For many families, spending time with their loved ones along with juggling work obligations means something has got to give. A solution that some families have found to be helpful in keeping up with their obligations is to hire a nanny, a housekeeper, or other type of help. Having a capable professional who can assist with responsibilities, as well as share their expertise is often invaluable.
If you’re thinking about hiring help, you may have some questions about how it will work — especially when it comes to finances. In addition to the cost, there could also be potential tax obligations that you should know about before hiring an employee.
Generally, if they qualify as a household employee, you may have to pay employment taxes. But there are also some things you’ll need to consider. In this guide, we’ll help you navigate the tax implications and ensure you’re accounting for employment taxes if needed.
What is a household employee?
A household employee is someone who works around your home as an employee. Household employees may include:
- Housekeepers
- Babysitters
- Gardeners
- Maids
- Butlers
- Caretakers
- Cooks
- Domestic workers
- Drivers
- Health aides
- Nannies
- Private nurses
- Yard workers
Contractors who you hire to work on your home aren’t considered household employees. This might include plumbers, repairmen, and general contractors.
Does My Nanny or Housekeeper Qualify as a Household Employee?
Before you can make a plan for taxes, you need to determine whether your nanny, housekeeper, or other household help qualifies as an employee. Typically, if you control which tasks they’re responsible for and how those tasks are completed, then they would qualify as an employee. Hiring a contractor to complete repair work in your home would not qualify because they control how their work would be completed, making them an independent contractor.
Pay requirements
Once you determine who could potentially be a household employee, you have to consider their wages per year. If you’re paying them more than $2,600 in 2023 or $2,700 in 2024, then they are considered a household employee in the eyes of the IRS and you’ll be expected to pay employment taxes for the household employee unless you meet an exception.
Age requirements
Any wages you pay to your spouse, your child who is under the age of 21, your parents (see the exception below), and any employee under the age of 18 at any time during the year (unless the service is considered their principal occupation), do not count as a household employee.
Relation exemptions
For parents, there is an exception on whether they should be considered household employees. They are considered household employees if both of the following are true:
- Your parent cares for your child who is under 18 or has a physical or mental condition that requires care for at least four continuous weeks in a calendar quarter.
- You’re divorced or remarried, you’re a widow or widower, or you’re living with a spouse whose physical mental condition prevents them from caring for your child for at least four continuous weeks in the calendar quarter.
So, why does it matter whether they’re technically a household employee or not? If you have a household employee, you must withhold your employee’s share of Social Security and Medicare taxes unless you choose to pay both their share and your share. The combined taxes are 15.3% of wages. Your share is 7.65% and their share is 7.65%. Although you are not required to withhold federal income tax from their wages, if your employee asks you to withhold federal income tax and you agree, you’ll need a completed Form W-4, Employee’s Withholding Certificate from your employee. This ensures you’re withholding the right amount of federal tax from their wages.
Can paying a household employee be considered a business expense?
If you’re thinking about claiming payments to your household employee as a business expense on your federal taxes, you’re out of luck. Household employees can’t be written off as business expenses.The IRS classifies nannies, housekeepers, and similar professions as personal employees.
Although you may not be eligible for a nanny tax deduction, there are other potential tax benefits when you pay for child care. We’ll discuss potential tax credits you might be able to claim to help with childcare costs in more detail shortly.
Do you need a tax ID form?
If you have household employees, you need a federal employer identification number (EIN) to file your taxes.
You can apply for an EIN by completing and submitting Form SS-4, Application for Employer Identification Number. Once you have your EIN, you can use it when you complete the W-2s for each of your household employees.
You can apply for your EIN online or via mail. If you apply online, you can receive your EIN immediately. If you choose to complete the application by mail, it can take up to four weeks to receive your EIN in the mail. If you forget your EIN, there are a few ways to look it up.
What tax forms do you need to submit?
At tax time, you’ll need to file a Form W-2 reporting your household employee’s income earned and withholdings and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration. Both forms will need to be filed by January 31st after the end of each applicable tax year
You will need certain pieces of information such as your household employee’s:
- Federal (and possibly state) income tax withholding selections if they want federal (and state) income tax withheld
- Social Security number
- Mailing Address (when it’s time to mail them their W-2s)
When you file your federal income tax return, you’ll also file Schedule H, which is where your total household employment taxes (Social Security, Medicare, FUTA, and withheld federal income taxes) are reported.
What Taxes Do You Need to Pay for a household employee?
As an employer, you’re expected to pay your portion of Social Security and Medicare taxes, which is 7.65% of his or her gross wages (6.2% goes to Social Security, 1.45% to Medicare).
If the gross pay is $1,000 for your employee, then you would be responsible to pay $76.50.
When you’re issuing your household employee’s paycheck, you will also deduct your employee’s share (also 7.65%) from their gross pay. In this case, they would have $76.50 deducted from their gross pay.
You may also have to pay federal unemployment taxes (FUTA) of 6% on wages up to $7,000.
What are the tax benefits of hiring a nanny?
It may seem like hiring a nanny can be pretty expensive, but there are some great tax benefits.
Two big tax benefits are:
- Dependent Care Benefit Accounts: Think of this as a flexible spending account for your childcare. Parents can contribute up to $5,000 (or $2,500 if married filing separately) tax-free for childcare, including your nanny.
- Child and Dependent Care Tax Credit: This tax credit can be worth up to $3,000 for one and $6,000 for two or more qualifying persons if you pay someone to take care of your kids so you can work or even look for work. Since this is a tax credit, it will reduce your tax bill dollar for dollar.
What if you pay your household employee under the table or don’t pay employment taxes?
If you hire a household employee, you’re responsible for filing and paying the appropriate taxes — but what happens if you don’t pay taxes or pay under the table?
Employment taxes are no different from other types of federal taxes. If you don’t pay your taxes, you may have to pay back taxes with additional tax penalties. You can actually save money if you pay your taxes when they’re due.
Remember, babysitters, housekeepers, nannies, and other types of hired help have tax responsibilities too. When you file a W-2 for an employee, that employee needs to file a tax return. Babysitters and nannies can check out our babysitter’s income tax guide to learn more.
