At a recent talk I gave, one of the questions that came up dealt with household employees and the homeowner’s responsibility. Considering that many people hire nannies in the summer, I thought I would review with you what the rules are, particularly the tax laws, with regard to household employees. It is important to keep in mind that when I talk about household employees it includes nannies, housekeepers and gardeners. Basically, if you hire these people directly as opposed, for example, hiring a landscaping service, these individuals are considered your employees. If they are going to make more than $2,100 a year you have tax obligations. No different than any other employer, you have to withhold Social Security taxes, Medicare taxes and in many situations, federal and state withholding taxes.
As an employer, not only do you have the obligation to withhold employment taxes from your employee but in addition, you have a tax obligation. As an employer you match your employees’ Social Security and Medicare contribution, and you can be liable for federal and state unemployment taxes. In addition, in many situations you may also have to buy worker’s compensation insurance on them. After all, if a household employee is hurt at your home, your homeowner policy would probably not cover you, thus, you need workers compensation insurance to protect yourself.
As an employer, you have an obligation to report your employees’ earnings on a W-2 each year. In addition, the money you withheld from your employee for state and federal withholding as well as Social Security, along with your employer obligations, must be paid to the government quarterly. In other words, you can’t wait until you file your tax return to pay the taxes. Income taxes and employment taxes are two different things, and it’s important that you don’t violate the rules because the penalties can be substantial.
I know what many of you are saying, and that is I pay my nanny in cash, so how is anyone going to know. Whenever it comes to tax law, my view is you should comply with the law. If you don’t properly handle your household employee, I have no idea what the chances are of you getting caught. However, I do know that you are breaking the law, and if you’re caught, the penalties can be substantial.
One last note on household employees, I generally recommend you have something in writing that spells out the terms of their employment. We live in a crazy world, and it is important to protect yourself, and having some sort of contract is a good way to do so. It’s unfortunate that we have to think that way, but in today’s world there really is no alternative.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.