At HomeWork Solutions, we understand that household employment can bring unique challenges for CPAs and financial professionals. Whether it’s a client who just hired a nanny or a question about how to handle household payroll taxes, we're here to make sure you have the insights you need. To help you guide your clients confidently, we’ve compiled a list of nine essential tips that will keep you on the right track.
1. Issue a W-2, Not a 1099: Understanding Worker Classification
When your client hires a household employee, like a nanny or a senior caregiver, it’s crucial to classify them correctly. According to IRS Publication 926, household workers are considered employees—not independent contractors. If your client dictates what work is done, how it’s done, and when, then a W-2 should be issued at year-end. Misclassifying the worker as an independent contractor by issuing a 1099 can expose your client to steep penalties. If you still feel unsure, you can request an official IRS determination using Form SS-8. Turnaround time for an answer from the IRS is usually at least 6 months.
2. File 1040-ES, Not Form 941: Simplifying Payroll Tax Reporting
Household payroll taxes are personal, not business-related. We often see clients considering setting up an LLC for household payroll, but this can lead to unnecessary complications. Household payroll taxes should be reported on the individual’s personal tax return, with a sole proprietorship FEIN used specifically for this purpose. Your client can skip the 941s and 940s typically associated with business payroll, and instead, focus on 1040-ES quarterly payments or the Electronic Federal Tax Payment System (EFTPS) to stay compliant.
3. Utilize Form 1040 Schedule H and Take Credit for 1040-ES Payments: Wrapping Up the Year with Ease
At year’s end, household employment taxes should be reported using Form 1040 Schedule H. This form captures the total tax obligations for household employers. If your client made 1040-ES payments during the year, they would receive credit on their Form 1040. If not, the taxes will be due with the annual filing. HomeWork Solutions makes this process even easier by providing an Employer Year-End Summary Report of the payment amounts and dates, so your clients can wrap up their tax obligations smoothly.
4. Keep Household Employees Separate from Business Payroll: Avoid Unnecessary Headaches
It might seem convenient for business owners to add household employees to their business payroll, but this creates more problems than it solves. Household employee wages can’t be deducted as a business expense, leading to extra accounting work to separate these transactions. Additionally, household employees require a separate workers’ compensation policy since business policies don’t cover them. Keeping household payroll distinct will save your clients time, money, and stress.
5. Encourage Paying On-the-Books: Protecting Both Employer and Employee
We can’t stress this enough: paying household employees on the books is essential. It’s not just about legal compliance—on-the-books payroll provides critical protections like unemployment insurance and workers’ compensation. It also ensures that employees build Social Security and Medicare benefits for their future. By encouraging your clients to pay on the books, you’re helping them avoid legal risks while supporting their employees’ financial security.
6. Avoid the Half-On, Half-Off Approach: It’s a Risk Not Worth Taking
Some clients might think they’re saving money by paying a household employee partially off the books, but this practice can backfire. Employees might even request this arrangement to stay eligible for income-based assistance programs. However, if the employee later files an unemployment claim based on their full wage, the employer could face an audit and significant penalties. It’s safer and smarter to keep everything above board from the start.
7. Don’t Forget About Back Taxes: Meeting Wage Thresholds
Household employment taxes kick in once certain wage thresholds are met. Once those thresholds are crossed, taxes are due on all wages paid, even retroactively. If your client hasn’t kept up with these payments, they could owe back taxes. Helping your clients stay on top of their tax obligations will protect them from unexpected bills and penalties.
8. Remember State and Federal Unemployment Tax Remittance
Beyond federal taxes, it’s essential to ensure that state and federal unemployment taxes (FUTA and SUTA) are properly remitted. These taxes provide critical unemployment benefits to employees and are a legal obligation for household employers. Ensuring timely payment and correct filing will help your clients avoid penalties and support their employees' financial security during periods of unemployment.
9. Local Taxes and Insurance Requirements: Stay Compliant
In addition to federal and state taxes, household employers may be required to handle local taxes, workers' compensation insurance, state disability insurance, and more. These requirements can vary significantly by location, so it's crucial to check the specific obligations in your client's area. HomeWork Solutions offers state-specific household employment quick fact sheets that provide detailed information on these requirements, helping you keep your clients fully compliant.
Partnering with You for Success
Household employment is a specialized area of the tax code, but it doesn’t have to be overwhelming. At HomeWork Solutions, we’ve been guiding families and financial professionals through these intricacies for over 30 years. We’re here to support you with expert advice and resources so you can confidently assist your clients with all their household employment needs. Schedule a complimentary consultation; we would be happy to discuss a specific client or situation with you.