Household employment tax, also known as the nanny tax, is one of the most misunderstood and underreported taxes.  The nanny tax covers all household employees, not just nannies.  Do you have a household employee?  The answer may surprise you.

It is important to understand who may be considered a household employee and what that may mean for you as a household employer. The IRS defines a household employee as “housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee.”  It seems the key words here are “as your employee”.  If you are paying an individual directly for services around your home, they are working directly for you and they would be considered a household employee. If you are paying an agency or business that then pays the individual, then they are an employee of the agency or business and not your household employee. 

Example:  Jane hires Sue to pick up her children from school three days a week and stay with them until Jane gets home from work.  Jane hires and pays Sue directly, so Sue would be considered a household employee.

Now consider if Jane requested the same service through XYZ babysitting agency, and the agency assigns Sue the job.  Jane pays XYZ babysitting agency and they pay Sue.  Sue reports to the agency, is paid by the agency, so she is considered their employee.  Sue is not Jane’s household employee.

If you have a home worker such as a health aide, private nurse, or caretaker and you control their wages, hours, and working conditions, they could be considered household employees and could subject you to the nanny tax.

The IRS definition of household employees goes on to say “repairmen, plumbers, contractors, and other business people who provide their services as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do but also how they do it.”  Therefore, an independent contractor who has his own equipment and supplies, controls how the work is done, and performs similar services for other homeowners is not your employee and does not fall under the nanny tax rules.

The employee/contractor relationship is sometimes difficult to determine, so do not hesitate to seek professional assistance to determine the status of your home worker.

If you determine that you do have a household employee, and you paid them $1,900 or more in wages in 2014, both you and the employee are required to pay social security and Medicare taxes (plus any applicable state employment taxes). That $1,900 threshold catches many unaware, as that breaks out to just $158 per month.  It is very easy to pay a babysitter, housekeeper, or cook above this amount without being aware that the nanny tax requirement has kicked in.

Also, make sure that you are in compliance with your state minimum wage laws, local worker’s compensation rules, and that your employee can legally work in the U.S.

If tax withholding is required, you can either do it yourself or engage the services of a payroll processing company. You can use a simplified method to pay the taxes (IRS Schedule H) and file with your personal tax return, but you will need to address state taxes and W-2 forms in an appropriate manner.  The due date for the W-2 forms is January 31.

Finally, do not overlook that wages paid to your household employee may be the basis for the child and dependent care credit if paid for child care while you worked.