Payroll Taxes

Do you employ a personal assistant or a care giver in your home? Have you wondered about the payroll and tax implications?  We can not give you a legal opinion, A qualified personal tax advisor is the only one who can advice you on your tax liability. Though we can give you some good old common knowledge of the law.  This is general information only, laws change all the time and we may have kept up with them all.  Please use this only as a handy guide, not as legal advice, we are not, and do not have qualified personal tax advisors on staff to help you.

1. I have a domestic (Personal Assistant, housekeeper) working in my home. What taxes do I need to pay?
2. What taxes does my employee pay?
3. How are the employee's payroll taxes paid?
4. How often do I need to pay these taxes?
5. Congress simplified the "nanny taxes." What does that mean to me?
6. My domestic (Personal Assistant, housekeeper) wants to be treated as a "contractor." Can I do that?
7. Do I need to pay minimum wage?
8. What about worker's compensation and disability insurance?
9. Am I required to hire U.S. citizens?
10. My employee is not a legal resident. What should I do about employment taxes?
11. What is "New Hire Reporting"?
12. I have heard that I can get a personal tax break for dependent care? Is that true?
13. Is health insurance for my domestic (Personal Assistant, housekeeper) taxable?
14. What may happen if I don't pay the taxes?
15. Do the rules ever change?

1. I have a domestic (Personal Assistant, housekeeper) working in my home. What taxes do I need to pay?
In general, the Internal Revenue Service requires payroll tax filings by a domestic employer who pays a household employee more than $1400* cash wages in a calendar year. These payroll tax obligations may include:

• Social Security & Medicare Taxes (7.65% of Gross Wages)
• Federal Unemployment Tax (FUTA) (0.8% of Gross Wages or less in Most Circumstances)
• State unemployment and disability insurance taxes levied on the employer.
• Advance payment of the earned income credit for eligible employees.

(* Wage test is $1300 for 2001 & 2002, $1200 for 2000, $1100 for 1998 & 1999, years 1995 - 1997 were $1000)

2. What taxes does my employee pay?

Your employee contributes to or pays:

• Social Security & Medicare Taxes (7.65% of Gross Wages Collected and Remitted by Employer)
• Employee Disability/Unemployment Taxes where required.
• Federal/State Income Taxes

3. How are the employee's payroll taxes paid?

You, the employer, are required to collect the employee's social security and medicare taxes. Should you fail to collect, you remain responsible to remit these taxes for the employee. Deducting federal income taxes and most state income taxes is optional. If income taxes are not withheld by the employer, then the employee is required to make periodic payments of any amounts due.

4. How often do I need to pay these taxes?

Employers of domestic workers must, at a minimum, make annual payments for Social Security, Medicare and Withheld Income Tax (if applicable). Wage reporting must occur quarterly. Generally, state unemployment taxes and withheld state income taxes must be paid on a quarterly basis and Federal Unemployment is due annually. You are required to give your employee a wage and tax statement (Form W-2) no later than January 31.

5. Congress simplified the "nanny taxes." What does that mean to me?

Congress revised the "Nanny Tax" legislation in October 1994, offering household employers alternative means to remit the federal payroll taxes for wages paid after 1/1/95. Most payments to household workers under 18 years of age are now exempt. The legislation requires employers to disclose the wages paid to household staff on the employer's personal income tax return. Failure to disclose this information will compromise the integrity of your personal tax return.

Most important, this 'simplification' only affects your FEDERAL employment tax obligations. Most state reporting requirements remain on a quarterly schedule.

6. My mother's care giver says she's an independent contractor and doesn't want taxes withheld. Can I do that?

If you are paying for care privately, the simple answer is no. The IRS has strict guidelines to define employees and independent contractors (Refer to IRS Publication 926). Personal Assistants and other domestics are generally considered employees. It does not matter how the employee refers to herself or how you refer to her in an employment contract. You are obligated for all payroll tax filings and remittances.

The IRS reaffirmed this stance twice in 1999. In two private letter rulings (PLR 199923014 and 199923015) the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status.

If you engage an Personal Assistant whom you do not pay directly - you pay an agency for example - and the referring agency establishes the scope of work, the care giver pay rate , the agency pays the care giver, and even determines which care giver to send to you, you will generally not be considered the employer of the agency personnel and you will not have payroll tax obligations.

6a.Families often engage a family member to provide elder care services and wish to fairly compensate them for their work. Publication 926 linked below on page 3 outlines the limited family member exemptions from the employment taxes. In general, other adult family members who receive a wage for their services are treated like any other employee.

7. Do I need to pay minimum wage? 
Domestic employees have been covered by the Fair Labor Standards Act since 1974 and must be paid at least the minimum wage, currently $6.75 . You are required to pay a domestic employee who lives out overtime (for hours above 40 in a week). Overtime is one and one-half times the normal hourly rate. Live-in employees must be paid for every hour they work but are not automatically entitled to the overtime differential. (There are many states which enforce higher minimum wages. Where Federal and state law have different minimum wage rates, the higher standard applies.

These rules are governed by the Fair Labor Standards Act. Please familiarize yourself with these rules if you are considering a pay rate that does not meet FSLA standards.

IMPORTANT Elder Care Notice: in Coke v. Long Island Care (22-Jul-2004)the Federal Court of Appeals ruled that the FSLA regulations (29 C.F.R. § 552.109(a)) - which specifically apply to "companionship services" provided by other than family members of those receiving the services - are internally inconsistent and not owed the high level of deference usually granted federal regulations. The court found that "companionship services" exemption for home health-care providers should not apply to non-related employees because the intention of the regulation was to exempt companions, not individuals employed to assist with housekeeping and the daily activities of living. There had been several legislative attempts to expand the FSLA coverage applied to 'companions for the elderly and infirm' in the late '90's. Be advised that the professional accreditation of the eldercare worker will likely affect the FLSA exemption. When in doubt, and particularly when dealing with elder care workers with RN, LPN, and CNA licenses, we recommend that you follow the FLSA rules for domestic workers.

8. What about worker's compensation and disability insurance?

The state regulations governing who needs to obtain worker's compensation and disability insurance vary. We recommend discussing your local regulations with a licensed insurance broker.

Worker's Compensation is protection mandated under state law for a worker and his or her dependents against injury and death occurring in the course of employment. It is not health insurance, and it is not intended to compensate for a disability other than disability caused by injury arising out of employment.

The purpose of a worker's compensation system is to provide financial and medical benefits to the victims of 'work-related' injuries and their families regardless of fault. The cost of this insurance is borne by the employer. Insurance premiums are determined by the number of employees, their annual payroll, and the type of work they do.

This insurance may be purchased through a licensed insurance broker and/or a state insurance fund. This is a policy of insurance and not a payroll tax.

WORKERS' COMPENSATION REQUIRED FOR FULL- AND PART-TIME DOMESTIC EMPLOYEES IN CALIFORNIA.

9. Am I required to hire U.S. citizens?

You may legally hire a U.S. citizen, an alien lawfully admitted for permanent residence, or an alien with a valid work permit. You are required to verify your candidate's employment eligibility using Form I-9.

10. My employee is not a legal resident. What should I do about employment taxes?

The IRS maintains that the immigration status of your employee has no bearing on your obligation for employer taxes. The IRS requires that workers ineligible for Social Security Numbers file form W-7 to request an Individual Taxpayer Identification Number. This number will be used on all tax reports and returns, including Form W-2. The IRS is currently prohibited from sharing this information with the Immigration and Naturalization Service by law. Non-payment of taxes is a reason for an alien's immigration petition to be declined.

Click Here for Form W-7 (Adobe PDF format)

11. What is "New Hire Reporting"?

Effective January 1998, Federal welfare reform legislation (Personal Responsibility and Work Opportunity Act of 1996) requires all employers to report information on all newly hired workers within a specified period, generally 2 weeks, or incur a penalty. Each state has designated an agency responsible for the collection of data and enforcement of the requirement. These laws are intended to expedite enforcement of child support orders.

12. I have heard that I can get a personal tax break? Is that true?

Often, the in-home help is paid for by the person receiving the care. In certain circumstances, the in-home help may qualify as a medical expense. A qualified personal tax advisor should be consulted to determine whether these expenses are deductible on an income tax return.

13. Is health insurance for my care giver taxable?

Health insurance may be provided as an employee benefit. The employer generally pays the premium directly to the insurance carrier, does not deduct the insurance premium from the employees paycheck, and the premium is not taxed as income to the employee.

14. What may happen if I don't pay the taxes?

Failure to report domestic wages paid after January 1, 1995 will compromise the validity of your personal income tax return. Additionally, there is no statue of limitations on the failure to report and remit federal payroll taxes. You are most likely to be "caught" when a former employee files for unemployment benefits or social security benefits. Employers are generally required to pay back taxes, penalties and interest charges, and usually professional fees for an accountant and/or attorney.

15. Do the rules ever change?

Yes. Many rule changes resulting from the Federal "simplification" are still being defined. For example, in 1997 all household employers are required to submit Form W-3 to the Social Security Administration for the first time. Effective in 1998, Federal household employment taxes are subject to penalties if not paid in periodically by the employer, either by submitting quarterly payments or adjusting withholding on the employer's paycheck.