Thinking about hiring a nanny? There are many great reasons right now to get some help in your home. Many working parents are dealing with school closures during the Covid-19 pandemic. Others need help with routine household chores. Family time is already limited so why not get someone to take the work off your plate?
According to the IRS, if you hire someone to do household work, that worker is considered an employee. Examples of household (a.k.a. domestic) employment include:
- Child Care
- Cleaning people
- Domestic workers
- Health aides
- Private nurses
- Yard workers
Workers such as repair people, plumbers, electricians, and other businesspeople offering services as independent contractors are NOT employees. Household workers are your employees if you direct the work they do and also how they do it.
FICA Tax. When a household employee is hired, the owner of the home becomes responsible for paying the worker’s wage and withholding taxes on their earnings. If cash wages of more than $2,300 (in 2021) are paid to any one household employee, the household employer must withhold 6.2% of social security and 1.45% of Medicare taxes, (collectively called FICA tax) for a total of 7.65%. The employer must also contribute the same percentage (the employer’s share) of FICA tax.
Federal income tax. Federal income tax is not required to be withheld unless the employee requests it. If that is the case the employee would be required to fill out Form W4 (Employee’s Withholding Certificate).
If the employer must withhold FICA and/or federal income tax, then a Form W2 would need to be issued for each household employee. Because of this reporting of income on a Form W2, the employer is required to obtain a federal EIN and report the household employees’ earnings to the Social Security Administration under the EIN in January (for the prior year).
Maine Withholding tax. The household employee may choose to have Maine income tax withheld from their pay. If this is the case, the employer would register with the state of Maine for a Withholding Tax account.
Other Employer-paid taxes
In addition to the above-mentioned FICA tax, household employers may be required to pay additional taxes on the worker’s wages.
Federal Unemployment (FUTA). If you paid cash wages to household employees totaling more than $1,000 in any calendar quarter during the calendar year or the prior year, you generally must pay federal unemployment tax (FUTA) on the first $7,000 of cash wages paid to each household employee. Generally, a credit against FUTA tax can be taken for amounts paid into state unemployment funds.
State Unemployment (SUI). The state of Maine requires household employers to register on www.REemployME.com after $1,500 in cash wages are paid in a quarter. An account will be set up and the unemployment tax rate will be established. New employers are assigned a “starter” rate of 2.31% which is applied to the first $12,000 in wages paid to each household employee.
Note: Do not withhold or pay FICA, FUTA, or unemployment tax for any wages you paid to:
- Your spouse
- Your child who is under 21
- Your parent, unless an exception is met
- An employee who is under 18 at any time during the year.
Worker’s Compensation Insurance is not required by the State of Maine for household employers.
Paying taxes and reporting the earnings
The IRS requires all household employee/employer federal taxes to be reported on Schedule H of the taxpayer’s Form 1040. All taxes are due and payable when filing Form 1040 by April 15 (for the prior year). It is a very good idea to make quarterly tax deposits throughout the year to avoid a large tax bill in April.
Maine requires earnings to be reported quarterly, just like any employer in the state, on these forms:
- Form 941ME for reporting Maine income tax withheld from employees’ pay
- Form UC-1 for reporting Maine employees’ earnings and unemployment taxes
These state taxes are due based on the state’s tax deposit requirements which could be semi-weekly, monthly, or quarterly.
After considering all of the requirements of hiring help in your home, one might decide against it. Forms and taxes and deadlines take all the fun out of it. Luckily, a payroll service can remove all of these hurdles and make sure requirements are met and no deadline is missed. Local Economy Payroll is ready to help and we’ll walk you through all of the steps to get things going.