By Rose Lu Chen, CPA
Greenstein, Rogoff, Olsen & Co.
If you hire a household employee, you will have federal and California tax obligations with respect to your household employment.
A household employee is someone you hire to do your household work, and you can control not only the tasks he/she does but also how the jobs are done. Common examples include housekeepers, maids, babysitters, drivers, gardeners, etc. In contrast, repairmen, plumbers, and constructors, who control how their work is performed, are considered independent contractors.
All employees hired after November 6, 1986 and working in the U.S. must complete I-9 “Employment Eligibility Verification”. An employer is responsible for ensuring that the I-9 is timely and properly completed.
EIN and EDD No. Application:
The first thing you need to do is to apply for a federal employer identification number – FEIN (instead of using a Social Security Number) and an EDD number respectively by filing Form SS-4 (for federal) and DE 1HW (for California State).
Federal and State Income Tax Withholdings:
With respect to federal and state income tax, you are not required to withhold from your household employee’s salaries unless the household employee asks you to and you agree. If so, it is required to have a mutual agreement on federal and state withholding between employer and employee. The employer has responsibility to communicate with the employee to determine the respective federal tax and state tax withholding rates.
You may ask the employee to complete Form W-4 “Employee’s Withholding Allowance Certificate”, so that the correct federal income tax can be withheld from his/her pay.
Federal Employment Taxes:
As a household employer, you may be required to withhold and pay social security tax (SST) and Medicare (FICA). You may also be required to pay (but not withhold) federal unemployment tax (FUTA).
FICA: Both an employer and an employee have an obligation to pay FICA taxes. You (employer) are responsible for withholding your employee’s share of FICA taxes if your employee earns cash wages of $1,700 (annual threshold) or more (excluding the value of food and lodging) during the calendar year 2010. If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. At the same time, you must pay a matching amount for your share of the taxes.
The FICA taxes are split between social security tax and Medicare. The social security tax rate is 6.2% each for both an employer and an employee, for a total rate of 12.4%. The Medicare tax is 1.45% each for both an employer and an employee, for a total rate of 2.9%
FUTA: Rather than withhold FUTA from your employee’s wages, you have an obligation to pay FUTA taxes if you pay a total of $1,000 or more in cash wages (excluding the value of food and lodging) to your employee in any calendar quarter of the current year. The FUTA tax (maximum rate is 6.2% for 2010) applies to the first $7,000 of wages paid.
Reporting and paying: You must satisfy your “employment tax” obligations by increasing your quarterly estimated tax payments (e.g., paying quarterly estimated tax through estimated tax voucher, “Form 1040-ES”) or increasing your tax withholding from wages, rather than making an annual lump-sum payment.
You are not required to file any federal employment tax returns (also called payroll tax returns, such as Form 940 and Form 941), even if you have to withhold or pay tax (assuming you don’t own your own business, e.g., sole proprietorship). Instead, you just report the employment taxes on your individual income tax return, Form 1040, Schedule H.
State (California) Employment Taxes:
State (California) employment taxes include Social Disability Insurance (SDI), Unemployment Insurance (UI) and Employee Training Tax (ETT).
SDI, UI and ETT: An employer who pays an aggregate of $750 or more in cash wages to household workers during a calendar quarter must withhold SDI from his/her employee’s wages. 2010 SDI rate is 1.1% for all employees.
In addition, an employer who pays $1,000 or more in cash wages during a calendar quarter is subject to UI and ETT (also known as SUTA). Since the UI and ETT apply to the first $7,000 wages, you may only need to pay SUTA in the first quarter.
The unemployment tax rate is different each year depending on your unemployment history. Generally speaking, the maximum unemployment rate is 3.4% for UI and 0.1% for ETT respectively.
Reporting and paying: If you expect to pay annual household wages more than $20,000, you must file the Form DE 6, “Quarterly Wage Report” and make quarterly payments with Form DE 88, “Report of Contributions”. Both filing requirements and payments are due by the end of the following month of each quarter. You must then file a final report on Form DE 7, “Annual Reconciliation Statement” at the end of the year, usually due by January 31 of the following year.
Household employers paying annual household wages for $20,000 or less in one calendar year may elect to become an annual taxpayer and make one yearly payment for all state payroll taxes. The election is made by filing the Form DE 89, “Employer of Household Worker(s) Election Notice”. An annual taxpayer is required to file the Form 3BHW, “Employer of Household Worker(s) Quarter Report of Wages and Withholdings” on the quarterly basis and pay annual payroll taxes with the Form DE 3HW, “Employer of Household Worker(s) Annual Payroll Tax Return” on the annual basis.
Year End W-2:
You’re also required to provide your employee with a Form W-2, due by January 31, of next year. Additionally, you must file a Form W-2 and Form W-3 with the Social Security Administration. The due date for year 2010 is February 28, 2011. Your EIN must be included on the Form W-2.
An employer’s contributions toward health insurance premiums are not considered taxable income. Neither the employer nor the employee is required to pay employment taxes on that portion of the compensation.
You may have options to pay the health care premium directly to the health insurance company or give these dollars directly to your employee as a reimbursement. You must keep a copy of a current health insurance bill as proof of insurance reimbursement to the employee. Improper documentation will result in the reimbursement being treated as taxable wages and subject to tax withholding.
Be sure to keep careful employment records for each household employee for at least four years from the later of the due date of the return or the date when the tax was paid. Records should include: employee name, address and social security number; dates of employment; dates and amount of wages paid; dates and amounts of tax withholdings; amount of employment taxes paid by you on behalf of your employee; dates and amounts of any deposits of employment taxes and/or income taxes; and copies of all forms filed.
Summary of Filing Requirements:
Employee Information Request:
Application for Employer No.:
Federal – EIN (to use Form SS-4)
State – EDD No. (to use Form DE 1HW)
Thresholds for Tax Withholding or Tax Payment:
FICA – $1,700 (annual cash wages)
FUTA – $1,000 (quarterly cash wages)
SDI – $750 (quarterly cash wages)
SUTA – $1,000 (quarterly cash wages)
Employer Tax Liabilities:
Federal – FICA (6.2% SST and 1.45% Medicare) and FUTA
State – SUTA (UI and ETT)
Employee Tax Withholdings by Employer:
Federal – Personal Income Tax (Optional), FICA (6.2% SST and 1.45% Medicare)
State – Personal Income Tax (Optional) and SDI (1.1% for 2010)
Federal – Schedule H with Form 1040 (annually), W-2 (annually), W-3 (annually)
State – DE 6 (quarterly), DE 88 (quarterly) and DE 7 (annually)
State (annual taxpayer)- DE 89 (quarterly), DE 3BHW (quarterly) and DE 3HW (annually)
For more information please contact Rose Lu Chen at #510-797-8661 or firstname.lastname@example.org.