Compensating Domestic EmployeesStephen D Kirkland
November 23, 2008 — 1,375 views
A domestic (household) worker such as a maid, sitter, health care provider, or gardener is generally considered an employee of the homeowner if the homeowner can control how the work is done.
Whether the worker is full or part-time and how the worker is paid have little determination on whether the worker is an employee or independent contractor.
Domestic employers are required to withhold and pay FICA tax on wages of $1,600 or more per year per employee ($1,700 in 2009). However, they are not required to withhold federal income tax unless the employee requests that taxes be withheld. If the employee does request withholding, the employee must complete Form W-4 so that the employer can determine how much tax to withhold.
Domestic employers must pay federal unemployment tax (FUTA) if the he or she pays total wages of $1,000 in any quarter in the current or preceding year. FUTA applies only to the first $7,000 of wages paid to each employee in the calendar year. Similar rules apply for some state unemployment taxes.
Domestic employers must file Schedule H with their Form 1040 to report FICA, FUTA, and any withheld federal income tax. These taxes should be remitted to the U.S. Treasury along with quarterly estimated income tax payments.
Domestic employers are also required to file a Form W-2 for each employee from whom FICA or federal income tax was withheld.
If you are required to withhold payroll taxes and/or pay unemployment taxes on a domestic employee:
- 1) Obtain a federal employer identification number (EIN) to use on Form W-2 and Schedule H (Form 1040).
- 2) Have each household employee complete a Form W-4 if the employee wants federal income tax withheld.
- 3) Form I-9 (Employment Eligibility Verification) must be completed by the employee and employer to verify that the employee can legally work in the United States.
- 4) Determine state and local payroll tax and withholding requirements.
If the domestic worker does not meet the $1,600 wage requirement, but gets paid at least $600, the homeowner may need to file a Form 1099, rather than a Form W-2. The Form 1099 should be completed in January following the year of payment.
Payments made to a corporation rather than to an individual are not subject to these tax and reporting requirements.
On another note, many domestic employers now run background checks on prospective workers and contact their insurance agents to see if their homeowner's insurance will cover accidents and other actions of the domestic employees.
Stephen D Kirkland
Stephen D. Kirkland, CPA, CMC, CFC is a compensation consultant with Atlantic Executive Consulting Group, LLC, based in Columbia, South Carolina. He helps businesses and tax-exempt organizations structure compensation plans for their executives. He also serves as an expert witness in U.S. Tax Court cases involving the reasonableness of executive compensation across the United States. He can be reached through www.ReasonableComp.biz .