If you have a household employee, it can be tempting to pay the employee under the table. Many household employees, such as nannies, can even expect their wages in this way. However, this poses a significant risk to both you and your employee.
Not only is paying a household employee in cash illegal, but you could face additional interest, fines, and penalties from the IRS if discovered. Additionally, in order to receive benefits such as paid sick leave and unemployment insurance, the household employee must be paid legally.
However, you may feel that you don’t know where to start as a household employer. What do you need to have lined up to pay your employee legally? Here is a quick rundown to get you started.
What Qualifies as a Household Employee?
First, it’s important to understand what the IRS considers a household employee. It can be tempting to pay a nanny or a housekeeper as a contract employee (on a Form 1099), but this would be a mistake. The IRS is aware that people try to skirt the household employee tax laws in this way and will scrutinize your 1099 employee.
If you control the work and how the work is done, you are the employer. Examples of household employees defined by the IRS include babysitters/nannies, cooks, housekeepers, and health aides.
If the worker controls how the work is done, then the worker is self-employed. This might include a lawn care business that offers services to the general public. The service provides its own tools and hires its own employees.
Generally, with a household employee, you have outlined the terms and employment. You have established the expectations for the role and the hours involved. Your discussion with any new employees should include how they will be paid legally.
Complete All of the Paperwork
The first step in paying your household employee is to make sure your employee is legally able to work in the United States. You and the employee need to complete the Employment Eligibility Verification I-9 Form.
Your employee must provide proof of identity as evidence of employment eligibility. This could include a passport or permanent resident card. You can also do a combination of documents, such as a Driver’s License with a Social Security Card.
You’ll need to keep copies of these documents in your own records. If requested, you would provide them to prove employment eligibility.
Once you have established your household employee, you will need to be aware of any changes to tax, wage, or labor laws. For example, your city could pass a new minimum wage requirement or additional laws around overtime. The COVID-19 pandemic and the CARES act, in particular, had several considerations for household employers.
Carry Workers’ Compensation Insurance
Depending on your state, you may be required to carry workers’ compensation insurance for your full-time or part-time household employees. This protects an employee who becomes injured on the job. Workers’ compensation covers medical expenses and lost wages.
Follow Wage Requirements
You must ensure that you are following all state and federal regulations for minimum wage. If your state or municipality minimum wage is higher than federal, that is what you must pay.
You also must pay overtime for any work exceeding 40 hours per week, at one-and-a-half times the hourly rate. There could be some state or local variations to overtime pay as well.
If there are any changes to wage laws, you will need to adjust your household employee’s pay accordingly.
Paying Taxes and Filing Your Tax Return
When your household employee begins work, you’ll need to have the employee fill out a W-4. This will dictate how you will withhold income taxes, according to the employee’s income and filing status.
As a household employer, there are additional taxes you must pay. You need to pay Social Security, Medicare, and federal unemployment taxes on behalf of the employee. You will also need to withhold Social Security and Medicare from the employee’s pay for their share.
You will also need to determine if you must pay state unemployment insurance for your employee.
When it comes time to file your tax return, you will need to include a Schedule H to report your household employment taxes. You’ll need to account for the total Social Security tax, Medicare tax, and federal unemployment tax.
A Schedule H needs to be filed for any household employee paid at least $2,200 in the tax year. You also need to file a Schedule H if you pay cash wages totaling more than $1,000 in any three-month calendar quarter during the tax year.
Offsetting the Tax Expenses
It may seem like you will pay more by having a legally paid household employee. There are indeed some associated taxes for the employer. However, there are some ways that you can offset this expense.
If your household employee is a nanny or other caregiver, you may qualify for a tax break. You can claim your legally paid caregiver as a qualified expense.
If you have a Dependent Care Flexible Spending Account (FSA), you can also tax advantage of tax savings with a legally paid nanny or caregiver. You can set aside up to $5,000 of pre-tax earnings through your employer. You can then withdraw from the FSA account when you pay your nanny.
Protection For You and Your Household Employees
Paying your household employees legally protects both you and the employee. As the COVID-19 pandemic showed, illegally paid employees, like nannies, were left without any protection. They could not receive financial support or benefits like paid sick and family leave.