Do you have a nanny? A yard guy? A home health aide, house cleaner, vegan chef, live-in cat minder/goldfish psychic, assistant to your assistant or any other person you pay for personal or household help?
If you do, your household could be considered an employer in the eyes of the IRS. And that puts you on the hook for doing employer-like things, such as paying employment taxes.
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It's not just the 1% that face these domestic helper issues. Anyone to whom you pay $1,900 or more per year for services rendered is in "nannygate" territory, according to IRS household employee rules.
So, depending on the specifics of the business relationship, the dog masseuse you pay $50 a week ($2,600 a year) to keep Fido aligned might qualify as an employee. Same goes for the gardener who provides hours of year-round monthly landscape work for your very weedy and needy yard at $25 an hour.
Here's how to figure out if your minions count as official employees (according to IRS rules) to make sure you're not unknowingly (or, "unknowingly") committing tax fraud.
Employee or not?To qualify as an employee, the person doing work for you does not necessarily have to live under your roof. (Though that's a good sign that you do indeed have an employee situation on your hands.)
Someone is an employee if, according to the criteria outlined in IRS in Publication 926:
- You paid them $1,900 or more in wages during the calendar year.
- You hired them directly and you pay them directly (and they do not work for a service or agency).
- You control what work is done, as well as when and how it's done (e.g., you set the hours and specific directions, such as homework being done before dinner).
- You provide the tools, equipment, or supplies needed to do the work.
What makes someone a self-employed or independent contractor? Here's what Uncle Sam has to say:
- You're off the hook for employment taxes if it was your spouse, child, parent, or someone else under the age of 15 that you paid to pitch in.
- If the person does the work with his or her own tools and offers their services to the general public as an independent business, then they are considered a self-employed worker.
- People who are under the employ of a business (e.g., a cleaner you hired through a service) and where you pay the service and not the individual do not qualify as employees.
- Nor do helpers who operate as a small business or sole proprietorship. (So, a plumber or contractor is typically not considered your employee.)
- If the person provides the service from their home and not yours -- childcare services, for example -- they are likely not considered to be an employee of yours.
Note all of the hedging language in those lists. When in doubt, it's best to consult with a tax professional instead of waiting until it's too late (and getting socked with penalties, interest, and public shaming for not paying taxes that were due).
Who pays the "nanny tax" and how much is it?Maybe you didn't plan on becoming the czar of your own employment empire. But if you've hired someone who qualifies as an employee in the IRS's eyes and paid them $1,900 or more in 2015, you, like any employer, are responsible for paying Social Security and Medicare taxes on the wages you pay your household help.
The amount you'll pay to Uncle Sam for those taxes comes to a total of 15.3% of cash wages, with you and your employee splitting the tab and paying 7.65% each (although some employers pay the worker's share instead of withholding it from the employee's paycheck).
So, let's use our dog masseuse/goldfish shaman example above. In January you hire Clay to come to your home once a week to perform his magic on your pets. You provide the tools for him to work and he does this work only for you and on a schedule and in a manner dictated solely by you. You pay him $50 a week to perform these duties throughout 2015 for a total of $2,600 for Fido alignment/Goldie hypnosis duties.
If you split the Social Security and Medicare taxes, here's what you'll each owe to make things square with the IRS:
If you choose to cover Clay's portion of Social Security and Medicare taxes, then you'll owe the IRS $198.90 for the year.
Oh, but wait -- there's more. Let's say Fido needs more therapeutic petting during the winter and so you use Clay's services more frequently for the last three months of the year. If you pay a qualifying employee $1,000 or more in cash wages in any single quarter, you must also pay federal unemployment tax (FUTA) of 6% on cash wages up to $7,000. And depending on where you live, you may also owe state unemployment insurance taxes. (Beyond $7,000, earnings are not taxed, and if you are required to pay state unemployment taxes the FUTA tax you pay may be reduced.)
For FUTA, the employer is responsible for paying the tax (on top of paying at least half of the household employee's Social Security and Medicare tax liability). The IRS's Schedule H (Form 1040) for household employment taxes will walk you through these calculations.
Tax benefits that may help ease the painWhile having to shell out for the taxes is painful (and, it's worth mentioning, the law), depending on your income you may be able to recoup some of that money if you qualify for a tax credit for child or dependent care.
Bottom line: If someone you hire qualifies as an employee, be an upstanding, law-abiding employer and pay the taxes you owe to ensure that your employee gets all the same Social Security, Medicare, and unemployment benefits they've earned.
The article Nanny Tax Rules: Not Just for People With Nannies originally appeared on Fool.com.
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