We can all use a little help sometimes. Perhaps you need someone to help clean out your house. Or, maybe, you’re getting a bit up in years and want someone to help take care of your property. Mowing the lawn and shoveling snow was a lot more fun when I was 20 years old.
Alternately, if you’ve got young kids, you may fantasize about a nanny to watch them so you can simply shower or take a nap by yourself.
You don’t have to be rich to need and appreciate household help. But you might need an accountant to guide you through the convoluted maze of IRS rules and regulations that control the tax quagmire you’ve just stepped into.
Employee or Independent Contractor?
Lots of issues get raised with household help. The first is whether your hired help is really an “employee” or just an “independent contractor.” The IRS uses Form SS-8 to decide.
Form SS-8 details the various criteria that the IRS looks at within the law, and the agency’s focus is on control. Here’s what to think about…
Someone is an “employee” if you can control not only what work is done but how the work is done. Whether the worker is part- or full-time doesn’t matter. Neither does the fact that you hired the worker through an agency (unless you’re paying the agency directly), nor whether the worker is paid by the hour, day, week or by the job. Age doesn’t matter, either.
If you can tell the worker what to do and how and when to do it, then the worker is your employee.
Say you hire your next door neighbor’s daughter to baby-sit your kids and do light housework for four days a week in your home. You provide the supplies and equipment she needs to do the work. She’s your employee, even if she’s only 14 years old. And that’s despite the fact nobody tells a 14-year-old what to do.
If a worker can control how the work is done, then that worker may be self-employed. A self-employed person provides his or her own tools and offers services to the general public. Think a gardener using his own lawnmower rather than the kid next door using yours.
Someone who performs child-care services for you in her home is also generally an independent contractor.
If your worker is an independent contractor, your obligations are minimal. The worker gets a gross check, and you don’t withhold any taxes. Unless the worker is doing work for your trade or business, you don’t have to file any federal forms.
If you do have an office at home and pay an independent contractor $600 or more for services related to your business, then you need to file a 1099 MISC with the IRS.
If your worker is an employee, you’ve got a lot more work to do.
When you hire someone to work for you on a regular basis, you and the employee must complete the U.S. Citizenship and Immigration Services Form I-9 , Employment Eligibility Verification. By the first day of work, the employee must establish his identity and employment eligibility. You don’t file the form with any agency. But you keep it available for review upon notice by an authorized government official.
Now that you have an employee, you must withhold Social Security and Medicare taxes from his wages. You must also match those withholdings and remit them to the IRS.
Total Social Security and Medicare taxes are 15.3% of cash wages. Your employee pays half, or 7.65%, and your share is the other half. On $2,000 in wages, that means the total is $306, and you and the employee each pay $153.
You also have to pay federal unemployment taxes, as well as any state taxes due. The 2005 federal unemployment tax is usually 6.2% (or 0.8% with a credit of 5.4% if you paid all your state unemployment by April 17, 2006) of cash wages up to $7,000 per year. This one comes entirely out of your pocket.
Cash wages don’t include the value of food, lodging, clothes or other non-cash items you give your household employee.
Income tax withholding isn’t required for household help. However, you can do so if the employee requests. You can also make advance payments of the earned income credit where appropriate.
You use Schedule H, filed with your 1040, to report and pay these taxes. The Schedule H and full payment along with your return will all be due on April 17, 2006.
You’ll also need to get an employer identification number (EIN) and send your employee a W-2 by Jan. 31, 2006. You’ll need to file Copy A of Form W-2 with the Social Security Administration by Feb. 28, 2006.
Will You Get Audited?
The IRS does not normally snoop around people’s houses to check on whether you withheld from the kid who mows your lawn. Nor are they checking whether he, your repairman or most other people paid in cash reported that cash payment as income.
But here’s a little advice: Make sure you get along with your neighbors. The IRS enforces the rules based on what’s reported to them. Many of their "catches" are the result of angry or envious neighbors.
· The Baby Sitter Exception. Your baby sitter may qualify for exemption from Social Security and Medicare tax if she’s under age 18, if she’s your employee and if baby-sitting is not her principal occupation. The IRS does consider being a student an occupation. Strangely, you’d be liable for federal unemployment tax if you paid $1,500 or more in any one quarter. This also applies to the kid who mows your lawn, sweeps out your garage or walks your dog.
· The Income Exception. In 2005, you don’t have to pay any federal Social Security or Medicare taxes if you pay cash wages of less than $1,400 to any one household employee. You don’t count any wages paid to your spouse or to your child under the age of 21.
· The Unemployment Tax Exception. For unemployment taxes, you avoid any payment if the 2005 cash wages are less than $1,500 in any calendar quarter. And, again, wages paid to a spouse or to your child under the age of 21 don’t count.
- The Parental Exception. You don’t normally count any wages paid to a parent. (This is, however, subject to exceptions.)
Don’t expect to be nominated for the Supreme Court or any federal position if you skipped out on your household taxes and reporting. (Former president Bill Clinton lost two Attorney General nominees over that issue. President Bush lost a Labor Secretary nominee.) The “good” news is that payments for household help may qualify for the child and dependent care credit. If so, as much as 35% of your payments will be covered by the IRS.
Of course, you could just get out the lawn mower and do it yourself. Flex some physical muscle and avoid all the paperwork hassle. Then, you won’t have to pay a health club just to get some exercise.
Chuck Chuckuemeka is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising. Visit them at www.chuckcpa.com