Household Employee Deductions
Household employees can hurt you more than help you at tax time. You can't deduct the wages you pay from your income, although if you hire someone to care for a child younger than 13 or a disabled adult, you might qualify for the child and dependent care tax credit. Even if you do, this won't reimburse you for all you paid out. Additionally, you may owe the so-called "nanny tax" if you're an employer in eyes of the IRS – even if your worker isn't a nanny.
The high school student who mows your lawn on Saturdays is usually not a household employee. Lawn-mowing would have to be his primary profession before he might qualify. Workers subject to the nanny tax are those who report to your home at times and dates you specify; you also control what they do while they're there. You set their hours and dictate what services they provide. Exceptions exist if you pay your own child – provided he's under 21 – as well as your spouse, your parent or any teenagers. Special rules relate to parents, however, so if yours does work for you, speak with a tax professional.
Medicare is part of the nanny tax. You must deduct 1.45 percent from your household employee's wages to contribute to this federal hospital insurance plan. As an employer, you must also contribute 1.45 percent of what she earns. As of 2013, you and your employee are liable for Medicare tax if you pay him $1,800 or more. As of 2013, if your employee earns more than $200,000, you must withhold an additional .9 percent under the terms of the American Taxpayer Relief Act, passed by Congress in January 2013.
Social Security is the other component of FICA taxes that you must deduct along with Medicare. Social Security pays for disability, survivors and elderly benefits. As of 2013, your employee's Social Security contribution is 6.2 percent. You must also pay 6.2 percent. Social Security tax only applies on the first $113,700 of wages as of 2013. If you pay your employee more than this, you can stop deducting Social Security after her wages hit this threshold. Social Security tax deductions also begin when your employee earns $1,800 or more.
Unemployment is a complicated tax that spans both state and federal levels. You do not deduct unemployment from your employee's wages, however. As the employer, you alone are responsible for this tax, which is 6 percent as of 2012. You become liable for unemployment tax when you collectively pay all employees more than $1,000 in any tax quarter, and you must pay it on the first $7,000 that each of them earn. If you pay your state unemployment tax by April 15 of the following year, you can claim a deduction, however. You can subtract 5.4 percent from your unemployment tax bill to the federal government, reducing it to a net 0.6 percent rate.
Household employers are not required to deal with federal income tax withholding for their employees. You can if you want to, and if your employee asks you to do so and you agree. Your employee must provide you with a Form W-4.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.