FS-2019-13, October 2019
Families often hire individuals to care for children and dependents in their home, so family members can work or actively look for work. These individuals include babysitters, caretakers, health aides, nannies, private nurses and au pairs. As employers, family members have additional tax responsibilities for their household employee.
Social Security and Medicare taxes
Both the employee and employer pay Social Security and Medicare taxes (commonly called FICA). This applies if an employer pays cash wages of $2,100 or more to any one household employee. For FICA, both the employer and the employee pay to the IRS 7.65% of wages paid – 6.2% for Social Security and 1.45% for Medicare taxes. An employer generally must withhold the employee's share of FICA tax from their wages.
Employers generally don't withhold or pay FICA taxes on wages they pay to their spouse, a child under age 21, a parent or an employee under age 18 unless performing household work is their principal occupation. But, they need to report the compensation on a Form W-2, Wage and Tax Statement.
Withholding additional Medicare tax of 0.9% applies when an employer pays wages greater than $200,000 to an employee. For more information, visit Questions and Answers for the Additional Medicare Tax.
Federal income tax withholding
Employers don't need to withhold federal income tax from wages they pay to a household employee, unless the employee asks them to, and the employer agrees. The employee will need to complete a Form W-4, Employee's Withholding Allowance Certificate, for their employer.
The IRS encourages everyone to use the Tax Withholding Estimator to help them make sure they have the right amount of tax withheld from their paycheck. The estimator automatically links to Form W-4, which they fill out and submit to their employer.
Employers who must withhold and pay Social Security and Medicare taxes or withhold federal income tax need to complete Form W-2 for each employee. They also need to complete a Form W-3, Transmittal of Wage and Tax Statement.
Federal Unemployment Tax Act (FUTA)
Employers who paid cash wages to household employees totaling more than $1,000 in any calendar quarter during the calendar year, or the preceding calendar year, generally must pay FUTA tax on the first $7,000 of cash wages paid to each household employee. But, they don't count wages paid to their parent, spouse or a child under the age of 21.
Generally, employers can take a credit against their FUTA tax liability for amounts they paid into state unemployment funds. If they paid wages subject to the unemployment compensation laws of a credit reduction state, they may have a reduced FUTA tax credit. See the instructions for Schedule H (Form 1040) or FUTA Credit Reduction for more information.
Reporting household employee tax information
Individuals who pay wages subject to FICA tax, FUTA tax, or if they withhold federal income tax from their employee's wages, need to file Schedule H (Form 1040), Household Employment Taxes. But, a sole proprietor who must file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return, or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, may report the additional household employee tax information with the information for other employees on these forms instead of on Schedule H.
Those who file Schedule H with their Form 1040 can avoid owing additional taxes if they pay enough tax before they file to cover both employment taxes for their household employee and their income tax. They do this by making estimated tax payments to the IRS during the year using Form 1040-ES, Estimated Tax for Individuals. Also, those who are employed can ask their employer to withhold more federal income tax from their wages during the year to cover both employment taxes for their household employee and their own income tax liability. Those who fail to pay household employment taxes during the year may owe an estimated tax underpayment penalty.
Hiring au pairs
Some families hire au pairs to carry out child care functions. An au pair is always admitted into the United States on a J-1 visa. The au pair stipend constitutes "wages" because an employer-employee relationship exists between the au pair and their host family. Because au pairs include wages in gross income and need to file U.S. individual income tax returns, they need to apply for a U.S. Social Security number.
Au pair wages are not usually subject to Social Security and Medicare taxes because of the au pair's status as a J-1 nonimmigrant and as a nonresident alien. But, if the au pair had previously been in the United States as a student, teacher, trainee or researcher in F, J, M, or Q nonimmigrant status, then the au pair might be a resident alien during their current stay in the United States. In this situation, although dollar thresholds apply, the host family must withhold Social Security and Medicare taxes and pay federal unemployment tax. Find information about the thresholds in Publication 926, Household Employer's Tax Guide.
Credit for child and dependent care
Those who paid someone to care for a child or a dependent, so they could work, may be able to reduce their federal income tax by claiming the Credit for Child and Dependent Care expenses on their tax return.