The Internal Revenue Service defines HSH income as income earned by some household employees. According to IRS rules, the HSH designation applies if the employee didn't earn enough to require you to issue a W-2; that amount was less than $1,800 in 2013. The agency also has specific guidelines that distinguish between household employees and independent contractors.
If you have hired someone to do household work in or around your home, such as a nanny or housekeeper, that person may be considered a household employee. The deciding factor is whether you control not only what work is being done but how it’s done, too. For example, if your housekeeper follows your instructions and you provide all the supplies she needs, she is your employee. Other examples of individuals who could be considered household employees are yard workers, private nurses and baby sitters.
According to IRS rules, if the person working in your household controls how the work is done, she is not a household employee; she is an independent contractor. The IRS determines the status based on which party -- you or the worker -- has the most control in the arrangement. The agency uses a 20-point test that determines whether a worker can be considered a household employee. Some examples of what the test considers are whether the worker provides her own tools and supplies, whether she sets her own hours and whether she is free to hire help to assist her or work in her place. A worker who can do these things is usually an independent contractor, and therefore HSH earnings don’t apply.
Tax Consequences for Employers
If you pay a household employee $1,800 or more in a year, you’re required to pay Medicare and Social Security taxes equal to 15.3 percent of his earnings. You pay half, and you can withhold the other half from his wages. For example, say you hire a housekeeper to come in twice a week for four hours. Assuming the federal minimum wage of $7.25 per hour, he would earn $3,016 in a year. Your share of Medicare and Social Security taxes would be about $230. However, tax consequences can result even if an employee earns less than $1,800 in a year. If he earns $1,000 over the course of any calendar quarter -- which is plausible if you hire someone to take care of your lawn for the summer, for example -- you’re on the hook for federal unemployment tax, which was 6 percent in 2013.
Reporting HSH Income
You might have a teenager at home who works in your home or someone else’s home and earns HSH income -- less than $1,800 in 2013. If that’s her only income, she may not be required to file a return. However, doing so can have some benefits. If you choose to open a Roth individual retirement account in her name, maybe for college or to help her buy her first home, you could contribute up to 100 percent of her earned income. Because HSH income can sometimes be paid in cash -- meaning it doesn't create a paper trail -- filing returns can help you document those earnings.
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