Clearing Up The Differences
Do you have somebody providing you with services in or around your home? If so, then you need to establish whether they are a household employee or whether they are classified as an independent contractor. This is an important distinction, as if the person providing you services is an employee, then you’re required to withhold taxes for them throughout the course of the year, and to provide them with a W-2 at year end.
A Difference with a Distinction
There are several distinct factors that help determine whether a person you’ve hired to do work around the house is an employee or an independent contractor. If you’re not sure, then you can ask yourself a few questions. Do you have complete control over the job and its responsibilities? Do you tell them what to do and how to do it? If you provide the employee with all of the tools that they need to do the job, as well as provide them with the environment in which they do the job, and you have the ability to fire them, then they are most likely an employee.
By contrast, an independent contractor is somebody who is self-employed, and who not only provides the work for you, but also for others – perhaps your neighbors. Examples would be a landscaping service that you’ve hired to do your yard work, or a maid service that spends an hour or two with you and charges you a fee rather than you paying them a salary.
The people who service your pool, repair your appliances, do handyman work around your home: these are all independent contractors for whom you have no obligation to withhold taxes or submit any tax paperwork. Some people who use independent contractors are concerned that they need to file a Form 1099-MISC, but they do not have to. Though some of the expenses may be provided for services that are eligible for a tax deduction, a private individual has no requirement to prepare a 1099-MISC – only businesses fill out 1099-MISCs, and that is for expenses paid to independent contractors to whom more than $600 is paid in a tax year.
Household Employees: An Example
If you’re still not certain as to whether a person doing work for you is an employee or an independent contractor, consider the example of Gina, a woman hired by the Brown family to provide care for their child as well as to do the housekeeping and cook their meals. The Browns provided specific job responsibilities to Gina. She was told exactly what needs to be done through the day and how she is to do it. She is also provided with all of the tools and supplies that she needs to get the job done. Gina is not free to make decisions about how she cleans, what she cleans, when she cleans, or how she will treat the Brown’s child – everything is according to the instructions that the Browns gave her. The Browns pay Gina by check and withhold taxes on her behalf. They also provide her with a W-2 at the end of the year, because she is a household employee.
Employer Responsibilities for Household Employees
As an employer of a household employee, you have the same responsibilities as any other employer for their workers: as long as their income exceeds the $2,000 threshold for 2016, you are required to withhold a portion of their wages for Social Security and Medicare taxes. If you provide the employee with lodging, food, clothing, or other items, they are not subject to FICA taxes, even though they can be considered part of the employee’s wages. If the employee is given cash in lieu of receiving any of these items it is taxable.
Though the employer is required to withhold Medicare and Social Security taxes for a household employee, they do not have to withhold income tax. However, if the employee requests it and the employer agrees, it is permitted. When this is the case, the employee needs to complete a W-4, then consult the federal income tax and FICA tables to determine the correct amount to be withheld based on their wages, which means the total of their salary, any pay they receive for vacation or holiday, noncash items including clothing and lodging, and bonuses. Lodging provided on the employer’s premises and meals that are provided there, and which the employer provides for the sake of their own convenience, are not to be included as they are not taxable, and therefore not subject to withholding.
If you are an employer of a household employee and would prefer to simply pay the employee’s FICA taxes directly rather than withholding them from their wages, you can do so, but must understand that the taxes paid need to be included as wages when calculating the amount to withhold. According to the Federal Unemployment Tax Act (FUTA), if the cash wages you pay your household employee come to more than $1,000 in a calendar quarter in either the current year or the prior year, you are also required to pay unemployment tax.
People who hire household help may not have anticipated that doing so would require that doing so would mean so much paperwork for them, but there is some required. The employer needs to fill out Schedule H, a form that reports the amount that they pay in taxes for the household employee’s Medicare, Social Security, income tax and unemployment taxes. For those who are sole proprietors, these records can be incorporated into the payroll reporting for the business, but not as a business expense.
The documentation of a household employee’s tax withholdings can be incorporated into the employer’s standard 1040 tax return. If your state also requires reporting about household employees, you may need to submit additional paperwork to them.
Our Professionals Can Help
Many people are uncertain as to whether the services that they are receiving qualify as household employment of independent contractors. If you need help determining your obligations or in preparing the appropriate documentation, call our office to set up an appointment.
Have questions about your household help? Call us at (408) 990-3365 to set up a consultation regarding your accounting and tax planning needs.