What is a Household Employee?
A household employee is a person who provides paid services within a private home. These services are often subject to payroll taxes.
How Does a Household Employee Work?
According to the Internal Revenue Service, these types of workers may be deemed household employees for tax purposes: babysitters, caretakers, housecleaners, maids, nannies, drivers, health aides, private nurses and yard workers.
For example, let's say John and Jane Doe hire Sally Smith to take care of their two preschool-age children while they are at work. They set Sally's work hours, determine her pay, and have the authority to hire and fire her. Over the course of the year, they pay Sally Smith $15,000.
The IRS deems Sally a household employee, and therefore John and Jane Doe must pay payroll taxes on Sally's $15,000 of income. 'Nanny tax' is a colloquial term for the Social Security, Medicare, and federal unemployment taxes due on the pay to household employees.
Each year, the IRS announces the minimum income on which the nanny tax applies. In most cases, if John and Jane have their 17-year-old son or other family member watch the kids, the tax also does not apply. According to the IRS, wages paid to a spouse, children under 21, a parent, or any employee under the age of 18 are usually not subject to the tax.
It is important to note, however, that independent contractors usually do not fall under the IRS definition of a household employee. So, if Sally Smith runs her own dog-walking business or TV repair service, and John and Jane Doe hire her to walk Fido once a week or fix the TV, Sally would not count as a household employee for tax purposes. Similarly, if Sally Smith works for ABC Maid Service and comes to the house twice a month to clean, she is not a household employee for tax purposes, because the ABC Maid Service provides Sally to the Does and controls the work she does.
Why Does a Household Employee Matter?
Nanny tax liabilities can come as a surprise to many working parents, and they should take the time to educate themselves about their responsibilities when hiring domestic help. Many people erroneously think the number of hours worked or the full-time/part-time status matters in the eyes of the IRS (it doesn't). Typically, the nanny tax is tacked on to a taxpayer's tax liability when filing income tax, though failure to pay the nanny tax on a timely basis can trigger interest and penalties from the IRS. Also, states have their own conditions and requirements regarding the nanny tax.
It is important to note that the nanny tax can apply to any domestic help: gardeners, housekeepers, and other people who are employed in your home (regardless of whether they are caring for your children).