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For tax and labor law purposes, a household employer is defined as someone who pays an individual to perform duties in or around their house. Household employees include nannies, caregivers, private nurses, housekeepers, gardeners, cooks, personal assistants, household managers, etc. If you pay that individual $1,600 (2008) or more in a calendar year, you are required to meet the tax obligations listed below. If you do not meet the threshold, please note that you are still considered a household employer and must adhere to federal and state labor law.
There is a common misconception that domestic workers can be labeled "independent contractors" so that taxes can be avoided. Please be warned that the IRS has ruled definitively on this: household workers should be classified as employees and the families that employ them are required to obey all state and federal tax and labor laws.
- Household Employers can expect to pay employer taxes in the range of 9-11% of their employee's gross wages. Specifically, those taxes are:
- Half of Social Security & Medicare (7.65% of employee's gross wages)
- California Unemployment Insurance (3.4% on first $7,000 of employee's gross wages)
- Federal Unemployment Insurance (0.8% on first $7,000 of employee's gross wages)
- California Employment Training Tax (0.1% on first $7,000 of employee's gross wages)
The Good News: these tax costs can be largely offset - sometimes completely offset - by federal tax breaks (see Tax Breaks & Other Benefits of Paying Legally).
- Household Employers are required to withhold taxes from their employee's paycheck. Specifically:
- Half of Social Security & Medicare (7.65% of employee's gross wages)
- Federal Income Tax (based on allowances chosen by employee on Form W-4)
- State Income Tax (based on allowances chosen by employee on Form W-4)
- California Disability Insurance (0.8% on first $86,698 of employee's gross wages)
It is not required that federal & state income taxes be withheld. However, it is strongly recommended in order for your employee to avoid a large tax obligation at year end. By law, all other taxes mentioned above must be withheld each pay period.
- Household Employers in California are required to carry a Workers' Compensation policy on employees.
Workers' Compensation is not a tax; it is an insurance policy that provides help with lost wages and medical expenses due to injury or illness resulting from the workplace. Often, it is covered under your homeowner's insurance policy; if not, you can request a rider be added to your policy. For additional questions on providers and benefits, the California Division of Worker's Compensation can provide assistance at 1-800-736-7401.
- Household Employers must meet Federal and California labor law requirements.
Household employees are classified as non-exempt workers and federal overtime law dictates that non-exempt workers must be paid overtime for more than 40 hours in a 7-day work week. Overtime is calculated at a rate of 1.5 times the regular wage. Household employers do not have to pay overtime rates to Live-In Employees, but they must pay the regular wage for every hour that their employee performs duties.
Household employers are not required to provide paid vacation, sick days or holidays (except in San Francisco where employees earn paid sick leave throughout the year - please call us for details).
Household employers are entitled to tax breaks if they pay their employee legally. There are two tax break options:
- Dependent Care Account. Many companies allow employees to contribute up to $5,000 of their pre-tax earnings to a Dependent Care Account to cover childcare expenses. Depending on tax bracket, this can save employers up to $2,300 per year, offsetting most - if not all - of their employer tax liability.
- Child Care Tax Credit. For those without access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your personal income tax return at year end. This tax credit is worth up to $600 for one child or $1,200 for two or more children.
In addition to tax breaks, there are other advantages to paying legally. Specifically:
- Job History. Your employee establishes an employment history which is necessary to qualify for a car loan, home loan, student loan, credit cards and many other everyday transactions.
- Social Security & Medicare. Your employee receives benefits and basic medical coverage when she retires. Studies show the average household employee will receive $5 for every $1 they contribute.
- Disability & Workers' Compensation. Your employee receives benefits if she becomes hurt or sick and is unable to work (i.e. accident, maternity leave, extended illness, etc.).
- Unemployment Benefits. Employees are entitled to receive unemployment benefits if they lose their job through no fault of their own.
- Peace of Mind. The IRS is cracking down on employment tax evasion, levying heavy fines along with back taxes and interest - even federal felony charges in some cases. If you pay legally, you have no worries.
Here's a summary of the compliance process required of household employers, which the IRS estimates would take the average person 50-55 hours per year:
- Register for federal and state tax accounts
- Complete and file New Hire Report
- Calculate the correct amount of federal and state taxes to withhold each pay period
- Track gross pay, net pay, federal taxes withheld and state taxes withheld
- Prepare state tax returns quarterly and remit both the employer and employee taxes
- Prepare federal tax estimates four times per year and remit both the employer and employee taxes
- Prepare year-end tax documents (W-2, W-3, Schedule H, and state annual reconciliation)
- Respond to IRS and state notices/requests/inquiries
- Monitor ever-changing household employment tax law
Founded in 1992 - by household employers for household employers - Breedlove & Associates specializes in handling all of the compliance requirements for busy families. With guaranteed accuracy and timeliness - along with unlimited advice and support from tax and labor law experts - we're proud that we've eliminated the household employment headaches, hassles, paperwork and risk for more than 10,000 families in all 50 states.
If you have additional questions or would like more information, click here.
A Complimentary Resource from Breedlove & Associates. © 2007-2008 Breedlove & Associates, L.P.
If you're seeking professional staff or employment, we invite you to contact In-house Staffing.
Aunt Ann's In-House Staffing
2722 Gough Street
San Francisco, CA 94123
Phone: (415) 749-3650
Fax: (415) 749-2081
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