A good domestic worker can help take care of your children, assist an elderly parent, or keep your household running smoothly. Unfortunately, domestic workers can also make your tax situation more complicated.
Domestic workers of all types generally fall under the “nanny tax” rules. First, you must determine whether your household helper is an “employee” or an “independent contractor.” If you provide the place and tools for work and you also control how the work is done, your helper is probably an employee. For example, at one end of the spectrum, a live-in housekeeper is probably an employee. At the other end of the spectrum, a once-a-month gardening service may qualify as an independent contractor.
If your household worker is an employee, then you, as the employer, may be required to comply with various payroll tax requirements. For the year 2012, one important threshold amount is $1,800. If you paid your employee this amount or more during the year, you are generally required to pay social security taxes on your worker’s behalf. The 2012 social security and Medicare tax for employers is 7.65% of your worker’s wages. The employee is responsible for a 5.65% tax (4.2% social security tax plus 1.45% Medicare tax) on his or her earnings. This amount could have been withheld from your employee’s wages, or you’re allowed to pay both portions yourself. In addition to social security taxes, you may be required to pay federal and state unemployment taxes as well as other state taxes. With these taxes go various deposit and filing requirements, including the requirement that you provide your employee with an annual W-2 form that shows total 2012 wages and withholding by January 31, 2013.
As you might expect, most people need assistance complying with the nanny tax rules. If you need details about the rules or help in dealing with them, contact our office.