It is tough enough to find the right person to care for your child in your home, without having to worry about the tax complications of becoming a household employer. Although the rules have been liberalized in some ways, other requirements are as stringent as they have always been. Here is a snapshot of what you must do to steer clear of trouble with the IRS when you hire someone to take care of your children in your home.
Social Security Tax (FICA)
As a general rule, you do not have to withhold or pay Social Security taxes or file payroll tax returns for any household employee, unless you pay the person $1,800 or more a year in 2012. However, once you cross that threshold (which is inflation indexed), you are burdened with Social Security tax responsibilities. For example, if you pay someone $10,000 a year to care for your child while you work, you must withhold $565 from the worker’s pay (5.65%) and pay the IRS 7.65% or $765. The 5.65% rate for employees is set to increase to 7.65% on January 1, 2013. There is one limited exception for wages paid to domestic employees who are under the age of 18. Social Security tax does not apply at all to these employees if domestic work is not their principal occupation, as is the case with students. This exception may help with steady evening and weekend babysitters; otherwise, it is not important to most parents, who need help with children during the day.
Federal Unemployment Tax (FUTA)
You must pay the FUTA tax for any household employee whom you pay more than $1,000 a calendar quarter. The effective FUTA tax rate varies state-by-state. For example, if you pay Georgia Unemployment Taxes for an employee, then you will pay 0.6% of their gross income (maximum FUTA tax of $42 per year).
Payroll Tax Paperwork
The FICA and FUTA you owe for any household employee is computed on Schedule H of Form 1040 and paid along with your regular income tax bill. Although you are not required to make estimated tax payments for FICA and FUTA, it might be a good idea to make quarterly payments to avoid an unexpectedly large bill when you file your tax return.
Federal Income Tax Withholding
Thankfully, you are not required to withhold federal income tax from the wages of household employees. However, you are required to file a Form W-2 for every domestic employee whose wages are subject to the Social Security tax. You should also apply for an Employer Identification Number for yourself.
There may be other tax complications as well. For example, many employers may have to file and pay state unemployment insurance tax for each quarter in which the state wage threshold is reached. The rules can be somewhat different if you have other employees.
As you can see, the tax rules for child care help continue to be complicated. We are in a position to advise you of the least troublesome way to take care of all your tax responsibilities. For more information, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
