Household Payroll: What You Need to Know

If you’re new to household payroll, it can be a tricky process to get the hang of. If you hire any domestic worker — such as a nanny, personal cook, or in-home senior caregiver — then you’re responsible for keeping detailed payroll and tax records.

There’s a lot to think about, and all of the legal requirements may seem overwhelming! Don’t panic, it’s not as bad as it sounds, and the effort is worth it for the benefits you and your workers receive in the long term.

Here are some helpful tips for managing your household payroll for the first time.

Household Employees are Hourly, Non-Exempt Employees

When working out a payment agreement with your nanny, or other household worker, it’s important to understand that they are non-exempt employees and are entitled to hourly wages.

Your compensation agreement should outline the employee’s hourly rate. Workers who do not live with their employer must be paid overtime for any hours worked past 40 in a 7-day workweek — and overtime pay must be no lower than 1.5 times that of the hourly rate.

You may choose to pay your employee based on an agreed amount per week. This is okay, as long as you have outlined the equivalent hourly wages in your compensation agreement.

For example, you might agree to pay your nanny $832 per week for 46 hours of work. Your compensation agreement would outline $16 per hour for the first 40 hours, plus $32 per hour for overtime.

You Should Pay on a Regular Schedule

Talk with your employee about how often she wants to be paid; whether weekly, or bi-weekly. Stick to this schedule. It will help make payroll overtime calculations and tax filing easier for you, and it allows your workers to budget their lives better.

Be sure to check with your area’s laws if you plan to pay less frequently than every other week — many states require that hourly workers must be paid either weekly or bi-weekly.

Even if your area does permit monthly, or semi-monthly payments, it’s a good idea to pay more frequently to make overtime calculations easier on both you and your workers.

You Must Verify Worker Eligibility

Before you hire a household worker and put them on your payroll, you must confirm they are eligible to work in the United States. You can do this by having them fill out a Form I-9.

You do not have to send this into any government agency, but you should have it readily available, in case your employee’s right to work ever comes into question.

You Must File Taxes as an Employer

If you hire domestic employees — which are different from independent contractors — you must file taxes, like any other employer would.

This includes withholding taxes from your employees’ paychecks. Filing as an employer is required by law, and doing so will help you avoid penalties if you’re ever audited by the IRS.

You Can’t Pay Household Employees Under Your Business Payroll

It’s a common mistake for business owners to pay their nannies and caregivers under their existing business payroll — this is a recipe for penalties from the IRS and opens the employer to workers compensation insurance exposure.

Instead, establish a new payroll for your household workers, as they do not benefit your existing business.

You Must Pay Payroll Taxes

Like any employer, you’re responsible for paying your share of payroll taxes. This is different from income tax — which is the tax your employees pay on their income.

Payroll taxes involve your share of Social Security, Medicare, and unemployment taxes. Social Security and Medicare taxes are shared between the employee and the employer, so that each pays 7.65% (for a total of 15.3%) to the IRS.

You’ll need to obtain an employee identification number (EIN) to file your taxes.

Be Aware of Whose Wages Require Taxes

In some infrequent cases, you may not be required to pay Social Security and Medicare taxes on an individual’s wages. This applies when you pay household wages to:

• Your spouse.
• Your children, if they are under 21.
• Your parent.
• An employee who is under 18 at any time throughout the year.

Of course, there are a few exceptions to these rules. For example, you must report your parent’s wages if they:

1. Care for your child who is under 18, or who has a physical or mental condition that requires personal care, and;
2. You are unmarried, or your spouse has a physical or mental condition that prevents him or her from caring for your children.

You will also have to count wages for employees under 18 years old, if providing household services are their principal occupation. Household services do not count as a principal occupation if the employee is a student.

Read up on the rules and requirements for the person you’re hiring, so you pay the correct taxes for your circumstances and won’t be hit with any penalties later.

You Aren’t Obligated to Withhold Taxes — But You Can

Though your household employees are responsible for their 7.65% share of Social Security and Medicare taxes, you (as the household employer) are not legally obligated to deduct these taxes from your worker’s paycheck.

Remember, even if you don’t deduct your employee’s share of payroll taxes, you are still required to pay the full amounts.

While you are not required to deduct your employee’s income taxes, most employees prefer that you do. In this case, your workers are entitled to know what taxes are being deducted. You can outline itemized deductions on their paychecks — this information should also appear on their W-2.

If you do not choose to deduct taxes from the worker’s paycheck, income taxes are the worker’s full responsibility; and they may elect to pay their taxes independently.

You Must Give Your Employees a W-2

At the end of tax season, be sure you hand over a W-2 to your workers, instead of a 1099. A 1099 is for independent contractors — people who provide services to the general public, and must pay their own payroll taxes in full.

Domestic workers, on the other hand, are your employees — they only pay half of the payroll taxes, while you’re required to cover the other half, just like any other employer. Filing a W-2 will ensure your household employees are classified correctly, and that you’re both paying your proper share of taxes.

Household payroll can seem daunting at first; but once you understand what’s required of you by federal and state law, you can pay your employees and file your taxes appropriately.

Contributed By: Kathleen Webb Co-founded HomeWork Solutions in 1993 to provide payroll and tax services to families employing household workers. Kathleen has extensive experience preparing ‘nanny tax’ payroll taxes. She is the author of numerous articles on this topic and has been featured in the Wall Street Journal, Kiplinger’s Personal Finance, and the Congressional Quarterly. She also consulted with Senate staffers in the drafting of the 1994 Nanny Tax Law.

Webb is a magna cum laude graduate of Boston College. She currently serves as Co-President of the International Nanny Association, the leading professional association in the in-home childcare industry.

Tags: household payroll, Income tax, Payroll tax, Social Security (United States)

Category: Family Finances