Understanding Accounting for Household Employment

By Published On: May 23, 2024Categories: Services-Accounting Services

As summer approaches and kids are looking forward to the end of school, you may be preparing for how to keep them busy over the summer months. If those efforts include a nanny or regular babysitter, you could be looking at additional accounting responsibilities as well. Understanding the intricacies of accounting for household employment is crucial to ensuring compliance with tax laws and providing accurate financial guidance. Read more below on some of the key aspects of household employment accounting, including tax obligations.

What is Household Employment?

Household employment refers to hiring individuals to perform domestic services within a private home. Common examples include childcare providers, housekeepers, gardeners, and personal aides. Unlike independent contractors, household employees work under the direct control and supervision of the employer.

Tax Obligations for Household Employers

One of the primary responsibilities of household employers is compliance with tax regulations. Here are the essential tax obligations:

  • Employment Eligibility Verification:
    • Employers must ensure that anyone they hire for household employment is eligible to work. This means that employees should fill out Form I-9 and submit it to their employer before starting work. This form also provides employers with the basic information, like full name, social security number, and address, that would be needed for filing a W-2 at the end of the year.
  • Social Security and Medicare Taxes:
    • Employers must withhold and pay Social Security and Medicare taxes (FICA) if they pay a household employee $2,700 or more in a calendar year (as of 2024). The employer’s share is 6.2% for Social Security and 1.45% for Medicare, with the same rates withheld from the employee’s wages.
  • Federal Unemployment Tax (FUTA):
    • Household employers must pay FUTA if they pay $1,000 or more in any calendar quarter. The FUTA rate is 6% on the first $7,000 of wages, though a tax credit can reduce this rate to as low as 0.6%.
  • State Taxes:
    • Employers must also comply with state unemployment insurance and disability insurance requirements. These vary by state, so it is essential to understand the specific obligations in the employer’s state of residence.
  • Income Tax Withholding:
    • While not mandatory, household employers can choose to withhold federal and state income taxes from their employee’s wages. This requires the employee’s agreement and submission of a Form W-4.

The following IRS link: Household Employer’s Tax Guide, can help answer any additional questions regarding household employment, but the team at SDK is also here if you need additional guidance. Reach out to us today at 612-332-5500 or at info@sdkcpa.com to be connected with a member of our Accounting Services department.