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HOUSEHOLD EMPLOYMENT- THE “NANNY TAX”

HOUSEHOLD EMPLOYMENT- THE “NANNY TAX”

Posted on August 23rd, 2016

A BREAKDOWN OF WHO IS A HOUSEHOLD EMPLOYEE AND WHAT IS AND WHAT IS NOT REQUIRED OF THE EMPLOYER

Private employment (as opposed to through an agency) of household employees requires strict adherence to federal and state (references are to Connecticut) laws.  Hiring of an individual as a nanny, babysitter, health aide, care-giver, gardener, personal assistant, housekeeper, chef, companion, caretaker, cleaning person, driver, maid, private nurse or other domestic worker and the degree of control of not only the work they do but how they do it, are determining factors as to whether the individual is deemed to be a household employee.

The Internal Revenue Service (IRS), United States Department of Labor (DOL) and the Connecticut Department of Labor provide the guidelines for payment of wages to household employees and the associated requirements incumbent to the employer.

According to the IRS, ‘”If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.”‘

If a domestic worker is paid $2,000 or more in a calendar year, the household employer must file Schedule H, Household Employment Taxes, with his/her annual Form 1040. There is a casual babysitting exemption if payments to an individual for a calendar year are under $2,000.

At the time of hire, Connecticut requires that the employer provide the household employee a Wage Notice outlining the hourly pay rate, regular hours of employment and the pay date.

If a Schedule H is required to be filed, the employer must apply for an employer identification number (EIN). A social security number cannot be used in place of an EIN.

If Connecticut income tax will be withheld, a Connecticut Form REG-1, Business Taxes Registration Application must be submitted to receive a Connecticut registration number. See below.

The household employer is required to withhold Social Security and Medicare taxes. Withholding of federal and state income tax is optional. However, various resources recommend withholding to avoid putting an employee in a difficult financial situation. According to the IRS Schedule H instructions, ‘” You should withhold federal income tax only if your household employee asks you to withhold it and you agree.”‘ The employee must complete a Form W-4, Employee’s Withholding Allowance Certificate for federal income tax withholding and a Form CT-W4, Employee’s Withholding Certificate, for Connecticut income tax withholding. See above for filing for a Connecticut registration number.  The federal withholdings are paid quarterly with the employer’s estimated tax payments Form 1040-ES.  Schedule H, filed with Form 1040, reports the household employment tax withheld on wages paid.

Connecticut income tax withholdings are reported annually on Form CT-941 HHE Connecticut Reconciliation of Withholding For Household Employers. Form CT-941 HHE must be paid and filed electronically by April 15 of the following year that taxes are withheld.

The employer is required to file annually (to the Social Security Administration) federal Form W-3 and Form W-2 and the Connecticut Form CT-W3 (to the Department of Revenue Services). The employer is also required to distribute Form W-2, employee’s copy, to the household employee. For 2016 forms, distribution of form W-2 to employees must be made by January 31, 2017.

The employer is also required to pay federal (FUTA) and state (SUTA) unemployment taxes. FUTA tax on wages that were paid to household employees are only due if wages of $1,000 or more were paid in any calendar quarter. Employer obligations for the unemployment taxes are due on a quarterly basis. Federal requires payment with the individual Form 1040-ES and then an annual reporting on Schedule H. Connecticut requires quarterly filing of Forms UC-5A and UC-2 with payments.

Filing of the above Connecticut forms requires a seven digit unemployment compensation number. The employer must apply for a Connecticut unemployment compensation number using Connecticut Department of Labor Form UC-1A, Employer Status Report for Unemployment Compensation.

It is not permitted by the IRS for an individual to put domestic employees on a company payroll, i.e., household employee wages are not deductible by a business entity.

However, the IRS does permit that, ‘”A sole proprietor who must file a Form 941, Employer’s Quarterly Federal Tax Return or Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, may report household employee tax information on these forms instead of on Schedule H.”‘

For payment of overtime in Connecticut, there are specific guidelines to determine whether a household employee must be paid overtime.

Because tax filings and payments, may be required on a quarterly basis, the employer should avoid procrastinating until ‘tax time’ to minimize any interest or penalties.

Reporting household employees’ wages and paying Social Security and Medicare tax is required by law.

Beers, Hamerman, Cohen and Burger is available to answer any questions and assist with your household employee reporting.

By Cindy Katz

Cindy has worked at Beers, Hamerman, Cohen & Burger (Fairfield) for over 20 years. Her background includes over 30 years in public accounting at several area accounting firms. Her diverse experience includes servicing many client industries including compressed gas, real estate, physicians, family limited partnerships and LLCs. In recent years, she has found herself concentrating on trust, estate and gift taxation. Cindy lives with her husband Gary in Trumbull and just recently welcomed the arrival of their third grandchild! During the summer months, Cindy catches up with reading on the beach. She is an aspiring golfer and hopes to one day make par.

Dear Clients, Business Associates and Friends,

As the coronavirus (COVID-19) continues to affect local communities and global economies, you may have concerns about your financial well-being as well as your business and employees. Or you may be wondering about how recently passed legislation impacts you and your enterprise.

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During this unpredictable and challenging time, it’s more important than ever to stay connected. We are in this together and our thoughts go out to all who have been impacted by this unprecedented situation.

Rest assured; we are here to help with your questions.

We have also assembled a list of resources to help individuals and businesses through this period.