I Have a Household Employee: What Taxes Must I Pay?

In addition to the salary you pay your household worker, you will also pay a combination of taxes throughout the year.

Note: while you may believe there are ways to avoid this – such as by paying your employee as a 1099 contractor – attempting to game the system could lead to serious trouble with the IRS, including fines and penalties.

We’ve already covered what types of employees fall into the household employee category and some of the thresholds for related payroll taxes in a prior blog post. Now we’ll discuss FICA, withholding, and what documentation you need to properly pay and file household payroll taxes.

Understanding FICA

FICA is not nearly as complex as it sounds. It outlines the Social Security and Medicare taxes that are paid by both the employer and employee.

Note: this is often referred to as payroll taxes, though it is not inclusive of all taxes you may incur on payroll.

Here’s what you need to know about FICA:

• The Social Security tax rate is 6.2 percent of all earned income up to $132,900 (for 2019). 
• The Medicare tax rate is 1.45 percent of all earned income, with no wage cap in place.
• Both the employer and employee pay FICA, which works out to a total tax rate of 15.3 percent of income up to $127,200 and 2.9 percent for any additional income.

What About Withholding?

According to the IRS, you are not required to withhold federal income tax on behalf of your household employee. Here’s what the agency has to say:

“You don't need to withhold federal income tax from your household employee's wages. But if your employee asks you to withhold it, you can.”

If you agree to withhold federal income tax, your household employee must complete Form W-4, Employee’s Withholding Allowance Certificate.

What You Need to Get Started

If you are required to pay employment taxes, you should collect and document the following information:

• Your federal and state identification numbers
• Payroll information for each employee
• Employee forms, such as a W-2 and W-4
• Quarterly filings for federal and state returns

Bottom Line

If you’re finding it difficult to understand your tax requirements as an employer, don’t take any risks. Failure to pay the necessary employment taxes can lead to trouble with the IRS, with penalties and fines reaching as high as $25,000.

Instead, consult with a financial advisor, such as your accountant, and consider hiring a payroll company with experience helping household employers. This will save you time and money, while also putting your mind at ease.