January 14, 2016
Many household employers do extensive research prior to hiring their employee and a common, misleading piece of internet information that employers come across is that household employees, like nannies and caregivers, have the option to not pay income taxes. This simple statement is incomplete at best and simply wrong at worst.
Per the IRS Publication 15, household employers are not required to withhold federal income taxes when they pay their household employees. That does not mean the employee does not or will not owe income taxes on their earnings, it only means that these taxes do not need to be withheld from the paychecks. We get a few calls every year, usually from non-NannyChex clients, where a bewildered employer is dealing with an angry employee who owes a large amount of taxes at tax time because no income taxes were withheld and the employee is blaming the employer.
We always recommend that employers discuss income tax withholdings with their employees PRIOR to starting payroll and maintaining documentation for how income taxes will be handled. Employees who want income taxes withheld should fill out a W-4 for their employer and the employer should use that form for calculating the payroll tax withholdings. The employer should also maintain the W-4 should there be a question about the employee’s taxes. Further, it is not uncommon for employers to include in their employment agreement that income taxes will or will not be withheld. Providing pay stubs to employees is important as well as it provides the employee with a detailed breakdown of what is coming out of their checks so there should never be any tax time surprises when it comes to withholdings. Certainly, if the employee wants the income taxes withheld, it is a good idea for the employer to accommodate this request. For employers who use NannyChex, the calculation/withholding and remittance of income tax withholdings is included in the service so there is no added cost or downside for the employer when employee incomes taxes are withheld. Employees who elect not to have income taxes withheld are able to make estimated tax payments themselves and/or budget for the year-end tax payment on their personal tax return.
Please contact one of our payroll tax experts if you or your household employee has questions on income tax withholdings.