Although hiring someone to help with household work will free your time for pursuing other tasks, it also creates a tax reporting burden that causes problems if overlooked. A domestic helper is normally your employee and you face requirements for withholding and remitting taxes on the worker’s earnings. The only exception is hiring a business or independent contractor engaged in the trade of providing domestic help. Unlike employees, these service providers have authority over how work is performed, such as scheduling and providing their own supplies.
You must pay both the employer and employee shares of taxes. You can either withhold the employee’s share of taxes from the wages paid or pay the employee’s portion of taxes with your own money as if you had withheld. Remitting the taxes requires you to obtain an employer identification number from the Internal Revenue Service by applying online or submitting Form SS-4. You also need to complete a Form I-9 with the worker to confirm employee identity. Some states also require that you obtain workers’ compensation insurance.
Taxes on Wages
Paying wages of at least $1,800 to domestic help in 2012 necessitates payment of taxes for Social Security and Medicare. This threshold amount can change each year. In addition, the tax rate is subject to adjustment. For 2012, the employee share of Social Security tax is 4.2 percent of wages and the employer part is 6.2 percent. Medicare taxes of 2.9 percent are equally divided between worker and employer. You don’t need to withhold federal income tax for domestic help unless the employee requests it by providing a Form W-4.
An employer incurs two components of unemployment taxes -- one paid to the federal government and another for the state. The federal tax is payable on the first $7,000 of wages only. Most states assess the tax on slightly higher wages, but maximums vary. Although the federal rate is 6 percent of wages, a credit is provided for payment of state unemployment up to 5.4 percent. The result is a net federal unemployment tax rate of 0.6 percent. Some states also assess other taxes on employers. All state assessments are paid separately from federal taxes.
You can report on your federal income tax return both your share of federal employment taxes plus amounts you withheld from worker wages. Use Schedule H to report wages paid to domestic help. Lines on this form state the percentages needed to calculate each type of tax. Total taxes on Schedule H will decrease your tax refund or cause you to owe a tax payment by the filing deadline. Alternatively, if you already pay and report employment taxes as a business or farm employer, you can include federal taxes associated with domestic help.
Give each domestic employee an annual Form W-2, which reports wages and withheld taxes. Include taxes you should have withheld but did not because you chose to remit them with your own funds. The IRS provides blank W-2s along with filing instructions and mailing address. Mail the W-2s to the Social Security Administration by the end of February, but give employees their W-2 copies by the end of January. If you are a business or farm employer and included domestic help in the tax payments and reports with other workers, include the W-2s of domestic employees with your business or farm W-2s.
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