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Understand Your Obligations for Household Employees
Do you employ domestic help, such as a nanny or housekeeper? If so, the IRS reminds you that you have all the responsibilities of an employer.
Basically, the IRS definition of a household employee is anyone who works in your home under your direction. For example, if you hire a nanny, set her hours and duties, and pay her—by check or in cash—she is your employee. On the other hand, if you hire a lawn service and the lawn service pays people to cut your grass, those people are employees of the lawn service. (The IRS does not consider a family member to be an employee.)
If you have a household employee, you and your employee both need to fill out a U.S. Citizenship and Immigration Services (USCIS) Form I-9, which verifies that the employee can work legally in the United States. You don’t need to send the form to the IRS or the USCIS, but you should keep it in a safe place, so that you can show it to an agent of the U.S. government if you are asked.
You also should keep records of the hours your employee works and the money you pay her. If you pay your employee more than $1,700 a year, you must file Social Security and Medicare taxes for her. The employee’s share is 7.65 percent of wages, and your share is also 7.65 percent. You can choose to pay the employee’s share, but you should keep records of what you pay.
If you pay your employee $1,000 or more in any quarter, you probably owe federal unemployment tax, which usually is 0.8 percent of wages up to $7,000 per year. You also might owe state unemployment payments.
You don’t have to withhold federal and state income taxes from your employee’s pay, unless she requests that you do; however, she should understand that she will be responsible for paying her income taxes, whether you withhold money or not.
Often people do not follow these guidelines with regard to their household employees. Either they don’t understand their responsibilities, or they think the IRS will never find out. That’s possible, of course. But if the IRS does find out, you could be in serious trouble. There is no statute of limitations on failing to file payroll taxes, so you could be caught years later and still be obligated to pay back taxes, penalties and interest.
It is very important to keep clear records of all payments and taxes for household employees. In wage disputes—such as, for example, if your nanny files for unemployment and says she earned more than she really did--the burden of proof falls on the employer. You should talk to your tax adviser to make sure you are handling payroll for your household help properly.
In addition to taxes, you probably need worker’s compensation insurance for your household employees. Worker’s compensation laws vary by state but, generally speaking, if your hypothetical nanny trips over a toy and falls down your stairs or is injured in some other way on the job, she can collect worker’s comp. If you don’t have coverage, you will have to pay her the same benefits she would have had under a worker’s compensation policy, and you could face fines for failing to provide the coverage.
Your personal umbrella policy specifically excludes losses that should be paid by worker’s compensation insurance. We can help you make sure you have the coverage you need to protect yourself and your household employees. Please give us a call at 847-572-0800 or email me at firstname.lastname@example.org.