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Employing A Household Worker
When hiring a household worker to provide daycare help, there are
two related issues. The first is the actual cost in "after tax"
dollars. The second involves the rules and paperwork required.
Actual Cost In After-Tax Dollars
If you are considering the dollar ramifications of paying an
in-house domestic, you must include the extra costs above and beyond
the actual salary. From a tax standpoint, you become an employer
and, as such, must pay the employer's share of federal and state
payroll taxes, as well as any required worker's compensation.
For federal purposes, using 2000 rules, you are responsible for
withholding social security and medicare tax (which amount to 7.65%
of the gross wages paid). Additionally, as the employer, you must
also match that dollar amount. There is also a federal unemployment
tax of up to 6.2% on the first $7,000 of wages paid per
employee–although it usually doesn't go that high. If you file your
state unemployment taxes on time, the federal rate is usually much
less than this, averaging around .8% instead since a credit of up to
5.4% is granted against state taxes paid.
There are several exceptions to these required federal filings. If
annual wage payments are less than $1,200, or are paid to a spouse,
parent, or your child under age 21, no tax is usually due. Also, if
you pay a household worker under age 18 for occasional help (such as
a babysitter) these filing rules usually don't apply either.
For most state purposes, you may have to pay an employer's
unemployment tax in addition to withholding state income tax from
the domestic's pay. You should also have worker's compensation
coverage in case the employee gets a job-related injury.
On the plus side, if this employee qualifies under the IRS dependent
care provisions, you may be entitled to a tax credit and/or a tax
deduction. The credit is based on a sliding scale percentage of
wages paid. The higher your income, the lower the credit with a
minimum(if you qualify) of 20% of the first $2400 in wages paid for
one qualifying child care credit, with a maximum of two qualifying
dependents allowed. For those taxpayers who qualify at work for a
special "flexible spending" plan, a deduction from taxable income of
up to $5,000 may be possible instead.
Paperwork Involved
There are numerous tax filings that must be made to the federal and
state governments when you hire an in-house domestic worker.
First, you must register with the federal and state authorities as
an employer. This means filing certain registration forms to record
you as an employer and to get the necessary tax identification
numbers, and employee benefits rates. You also should set up
worker's compensation coverage (which is usually done through a
commercial insurance carrier) when the state doesn't do it for you.
Your employee must fill out, sign, and submit to you a W-4 Form
which formalizes their name, social security number, and withholding
status. Also required for Non-US Citizens is an I-9 Form to prove
their legal work eligibility status.
As the employer, you are required to withhold, collect, and send to
the federal and state governments the appropriate payroll taxes as
discussed above. These taxes are usually sent in on a periodic basis
using some form of a coupon or worksheet. The due dates depend on
the dollar amount of taxes being collected. For most domestic help
situations, it is once a month, once a quarter, or once a year,
depending on payroll size.
On a periodic basis you must file appropriate federal and state
payroll tax returns. On these forms you are listing the gross wages
paid, the taxes withheld and due, and any amounts already paid in
through the coupons. For federal purposes, these filings can be done
in conjunction with your individual income tax return on "Schedule
H." Although the federal taxes due may be paid only once a year, you
may wish to elect estimated tax payments throughout the year to
avoid a large balance due at tax time. You will probably also need
to file a state unemployment tax return for the quarter, showing the
total wages paid, and the amount subject to state unemployment tax.
On a yearly basis, you also file appropriate year-end federal and
state W-2 forms for your employee. Periodically your worker's
compensation carrier will ask for a report to verify the gross
payroll in order to adjust the billing charges.
For people who are self-employed, federal treatment may be
different. Household filings may be done on different forms. A
quarterly form 941 or Form 913, and yearly FUTA form may be
required.
There are several minimum recordkeeping requirements of which to be
aware. As an employer, you are supposed to provide the employee with
appropriate pay stubs. You should also keep all related records for
at least four years beyond the year in question.
As you can see, it can get pretty complicated. Of course, failure to
follow all these rules and regulations can get even more
complicated, and much more expensive if you are charged with
penalties and interest for failure to file timely and proper
returns.
Naturally, you may elect to have these filings done by a
professional. In fact, approximately 50% of the taxpayers involved
in these filings do just that to avoid the potential headaches and
penalties for improper or late filing of all this paperwork.
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