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Taxes for Household Employers and Employees: An Overview

Summer is over, and many families are seeking household help.  Whether it’s an after-school sitter, a weekend caregiver, or an employee providing full-time or even 24 hour care, many families are employing domestic workers.  Both employers and employees have the same questions, concerns, and frustrations with payroll taxes.  Of course, no one likes paying taxes.  But more than that, employees and employers often don’t understand how the taxes are calculated and filed, or what benefit comes from paying taxes.  Here’s an overview to help:

For employees:

Domestic workers who have taxes withheld are paying in to Social Security and Medicare and receiving credit for their earnings history.  These contributions strengthen this safety net for employees once they reach their retirement years.

Employees who are properly paid with taxes being withheld will have an employment/payroll history which is useful should they want to take out a loan, rent an apartment, buy a car or house, or make similar large financial transactions.  The employment history may also help build a credit history for the employee.

Household employees who have their wages reported and taxes withheld receive the same benefits and protections that other professionals receive.  This includes being eligible for unemployment benefits when employment ends and possibly having workers’ compensation and disability insurance coverage should they be injured on the job (these insurance benefits vary by state and employment situation). 

If a domestic employee who is paid under the table attempts to file for unemployment or make an insurance claim after a work-related injury, they, and their employer, would endure a lengthy process where the employment history would be audited and scrutinized which would not only delay/complicate the employee’s claim, but would likely lead to back taxes being owed by both the employer and employee, and potential legal claims as well.

 Lastly, employees will not need to agonize over how to handle their income when filing their personal tax return as they will receive a W-2.

For employers:

It is the employer’s responsibility to confirm that their employee is eligible to work, along with reporting the wages paid, and withholding/remitting the payroll taxes.  The consequences for not properly handling an employee’s wages and taxes falls almost entirely on the employer so employers are wise to stay firm in paying their household employee(s) legally.

Household employers who seek to claim a tax credit for employing a domestic worker often find that the process is easier and stress-free when they have the proper employer tax accounts and earnings/tax history that comes with paying an employee “on the books.”

Domestic workers who are laid off may file for unemployment benefits.  If the employer did not establish a state account to report the employee’s earnings and pay unemployment taxes, state tax regulators will contact the employer regarding their former employee’s unemployment claim.  The employer may be subject to penalties and interest in addition to the retroactive taxes.

Household employers may not be able to obtain workers’ compensation insurance without a federal employer identification number (EIN) and/or state employer tax accounts.  Failure to obtain workers’ compensation coverage may put the employer at risk of violating state law mandating that the employer have coverage, and the employer could face penalties and fees.  Additionally, if a household employee is injured on the job, the employer could be liable for lost wages and/or medical expenses (in addition to the penalties and fees for not obtaining coverage if required by the state).

Employees who do not have taxes withheld may choose to report their earnings on their individual tax return.  This can be especially problematic for the employer if the employee did not understand that no taxes were paid in and faces a hefty tax liability at the end of the year and becomes disgruntled.  An employer with an employee who reports earnings that were not properly documented may be at a higher risk of being audited by the IRS.

A domestic employee may also “blow the whistle” on their employer for not properly handling their wages.  This scenario could unfold any number of ways, but the most common is when an employee attempts to take out a loan, rent an apartment, or make a large financial transaction and does not have the proper payroll documentation to verify their earnings/employment.  A disgruntled employee may also contact state tax agencies to report the employer for not reporting the earnings and paying taxes.

Certain employers may face professional consequences for not properly reporting their employee’s earnings and paying the taxes.  Government appointees and judges regularly find themselves in the news and face severe consequences and public ridicule for not remitting payroll taxes.  It is not just public servants who should be concerned about paying the “nanny tax.”  Lawyers, financial advisors, certified public accountants, doctors, dentists, and other professionals who are licensed and/or work in a field that demands integrity may put themselves at risk if they choose to pay their employee under the table.

Unfortunately for employers, the tax requirements and wage reporting are often interconnected and an issue with one tax agency often leads to problems with other tax agencies and/or workers’ compensation insurance. 

If a family opts to pay their employee “on the books” for professional reasons, as protection should their employment arrangement turn unpleasant, or simply because they want to follow the law, they are ensuring that no matter what happens, they can have the peace of mind that they did things properly and will avoid the potential risks above and the associated aggravation and potential expenses.



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