We're about to hire employees and need to know how much federal income tax to withhold and where to send this money along with other employment taxes?

Answer:

You'll need to:

Generally, employers are required to file Forms 941 quarterly. However, some small employers (those whose annual liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less for the year) may file Form 944 annually instead of Forms 941. See the Instructions for Form 944 for more information. Employers are generally required to also file Form 940 annually. See Topic 759 for more information about Form 940. Employers must also file with the Social Security Administration a Form W-2, Wage and Tax Statement annually for each employee along with a Form W-3, Transmittal of Wage and Tax Statements, and furnish a copy of the Form W-2 to each employee. See the General Instructions for Forms W-2 and W-3 PDF.

Monthly or semiweekly deposits may be required for taxes reported on Form 941 (or Form 944), and quarterly deposits may be required for taxes reported on Form 940. Employers must deposit all employment taxes electronically by electronic funds transfer (EFT). Employers should consult each form’s instructions or Publication 15, Section 11, Depositing Taxes and Section 14, Federal Unemployment (FUTA) Tax to determine when and how to make deposits.

The Modernized e-file (MeF) for employment taxes and E-file employment tax forms pages offer ways to file Forms 940, 941, and 944 electronically. See also Become an authorized e-file provider. Prospective participants must first complete and submit an IRS e-file application. You can complete the IRS e-file application online after registering for e-services.

We hired a nanny to look after our child while we work. How do we pay her Social Security taxes and properly report her income?

Answer:

Your nanny is considered your household employee and you're her household employer:

  • As a household employer, you only withhold and pay Social Security and Medicare taxes if the cash wages you paid her exceed the threshold amount for the year. See Publication 926, Household Employer's Tax Guide.
  • If the amount paid is less than the threshold, you don't owe Social Security or Medicare taxes.
  • If the amount paid is more than the threshold, you must withhold your employee's share of Social Security and Medicare taxes unless you choose to pay both her share and your share. The combined taxes are 15.3% of cash wages. Your share is 7.65% and her share is 7.65%.
  • If you decide to pay the employee's share of Social Security and Medicare taxes (instead of withholding from the employee’s wages), the amount you pay must be included in the employee's wages for income tax purposes. For information on how to report the taxes you paid on behalf of your employee, see Publication 926, Household Employer's Tax Guide, under the title “Not withholding the employee's share.” 
  • If you pay your employee in excess of $200,000 in a calendar year, you must also withhold a 0.9% Additional Medicare Tax from the wages. You’re required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to your employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee.
  • You may also be responsible for paying federal unemployment tax. Federal unemployment tax isn't withheld from employees' wages.
  • You're not required to withhold income tax from a household employees' wages. However, you and your nanny may agree for you to withhold income tax from her wages. In order to withhold income tax, have the nanny complete a Form W-4, Employee's Withholding Certificate.
  • If you must pay Social Security and Medicare taxes or federal unemployment taxes, or if you withhold income tax, you'll need to file Schedule H (Form 1040), Household Employment Taxes. You'll also need to file a Form W-2, Wage and Tax Statement and furnish a copy of the form to your nanny and the Social Security Administration.
  • If you're paying your household employment taxes using Schedule H, to avoid an estimated tax penalty based on your household employment taxes, you can:
    • Ask your employer to withhold more federal income tax from your wages;
    • Ask the payer of your pension or annuity to withhold more federal income tax from your benefits, or;
    • Make estimated tax payments to the IRS or increase the payments if you already make estimated tax payments.
  • If you're a household employer with a business that has employees, you may pay your household employment taxes with your business or farm employment taxes, and you must include your household employment taxes with the other employment taxes that you file on Form 941, Employer's QUARTERLY Federal Tax Return, Form 944, Employer's ANNUAL Federal Tax Return or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees; and also on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

 

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