Social Security and Medicare, collectively known as FICA taxes, are a mystery to many domestic employers. Who is liable for them, how are they paid, and where are they reported are just some of the questions that plague domestic employers. While both taxes are calculated as a percentage of the gross wages, the employee’s portion of Social Security is 4.2% (for 2011 and 2012 only) while the employer’s portion is 6.2%, and both the employer and employee’s portion for Medicare is 1.45% of the gross wages.
All domestic employees, with very limited exceptions, are required to pay the FICA taxes, even if they will only be in the US for a limited time and will not be able to take advantage of the benefits. The following link to the IRS website lists the exemptions: http://www.irs.gov/businesses/small/international/article/0,,id=131635,00.html.
As a domestic employer, you have the choice of how the employee’s portion is funded. You can choose to withhold the employee’s portion from their pay check or you can choose to fund this amount yourself as a benefit to the employee. Please note that if you choose to fund it, the amount that you contribute becomes taxable income to the employee. To make the concept understandable, assume your employee earns $100/week before taxes (also referred to as “gross” pay). At the end of the year, the employee will owe Federal and State income tax on $5200. If, however, you contribute the employee’s portion, the employee will owe Federal and State income tax on approximately $5,511.
Regardless of how it is funded, the total tax can only be remitted by you, the domestic employer. Your nanny, housekeeper, elder care worker, etc, cannot remit the tax themselves. It is paid to the IRS either through your quarterly estimated tax payment (1040ES) or, if you, as the employer, do not pay US income tax, it is remitted with the Schedule H each April 15th.
Federal Insurance Contribution tax Act, FICA, for short, is made up of Social Security and Medicare. Prior to 2011, the total tax of 15.3% was divided equally between employers and employees. Beginning with January 1, 2011, the employee’s portion of the tax was reduced from 7.65% to 5.65%. This resulted in a greater net wage, or take home pay, for the employee. This temporary "payroll tax holiday" is scheduled to expire December 31, 2012. The employer is still required to pay 7.65%, with both portions of tax being remitted by the employer.
Household employment taxes are complicated and the rates change frequently. It is difficult for an individual employer to keep abreast of all the changes. Download our tip sheet, “Conquering the Nanny Taxes” for an overview of all employer requirements, or call our office for a free consultation about your unique situation. 800.626.4829