You probably know that your personal income tax returns are due on April 15. But you might not know that if you paid a nanny or senior caregiver $2,700 or more to work in your home last year, you owe household employment taxes, too.
“You may not consider yourself an employer if you actually work for someone else and don’t run a for-profit business,” says Roy Frick, president of Frick Accountants Limited. “But if you have a nanny or other type of household employee, you probably are. And one of your responsibilities as an employer is taking care of taxes.”
If the April tax deadline is almost here and you haven’t taken care of taxes for your nanny or senior caregiver, you need act quickly. Depending on when you catch your mistake, your course of action will vary. So read further to find your solution, and contact Care HomePay if you need additional help.
If you’re reading this in February or March
These are the months when most people do all of their taxes for the year, but household employment taxes are a little different. If you hired a caregiver in the past year and didn’t withhold taxes from them or pay any employer taxes yet, you’ve missed several deadlines. But don’t panic.
“The worst thing you can do is ignore your taxes or quickly give your employee a 1099,” says Tom Breedlove, Sr. Director of Care HomePay. “Neither option is a legal solution and will actually make things worse.”
Here’s what you need to do right now:
1. Apply for your tax identification numbers
Before you can file anything, you need two numbers that identify you as a household employer: a federal employer identification number (FEIN) and a state employer identification number (EIN). You can apply for an IRS-issued FEIN online and receive a number instantly. And you can apply online for a state-issued EIN through your state’s department of revenue or department of labor — but you don’t receive the number right away. You can use this list of state government agencies to access the website for your state.
Although you can’t expedite the process of obtaining your state EINs in any way, you can call the agency office to see if they’ll give you the EIN so you don’t have to wait for snail mail.
Your state will also assign a state unemployment insurance tax number (SUIN) and an unemployment insurance tax rate, which you’ll need to calculate your unemployment insurance tax liability. All new household employers are assigned a standard rate, which can be obtained by calling your state tax agency or visiting their website.
2. Add up what you paid your employee last year
If you haven’t withheld taxes all year, first figure out how much you paid your employee. This amount will be considered their net (after taxes) pay. (Learn about the difference between gross and net pay). Whether you paid with checks or cash, you’ll need to find a record of all the payments you made. Moving forward, you’ll want to keep keep a log of the hours your caregiver works and what their hourly rate is so you don’t have to go through this exercise again in the future.
3. Calculate taxes based on net pay
Once you have your caregiver’s net pay figured out, calculate the taxes that should have been withheld. Have your caregiver fill out a W-4 (and state withholding form if you live in a state with income taxes) and apply the results to HomePay’s tax calculator. Knowing how much income tax liability they had last year is useful and will help you to determine how much to withhold from your employee moving forward.
The tax calculator will also estimate the amount of Social Security and Medicare (FICA) taxes that should have been withheld from your caregiver and paid by you. If you add the total income taxes and FICA taxes to your caregiver’s net pay, you’ll determine their gross (before taxes) pay. This is the amount you’ll need to report to the IRS and state tax agencies.
Note: FICA taxes total 15.3% of your caregiver’s gross wages but are generally split evenly between the employee and the employer. Your caregiver will have 7.65% of their gross wages withheld from their pay (6.2% for Social Security and 1.45% for Medicare), and you’ll pay a matching amount.
4. Discuss who will pay for the taxes
The tax system isn’t designed for your caregiver to pay their own share of Social Security and Medicare (FICA) taxes because they’re your employee. Only you as their employer can pay those taxes. Your employee can, however, pay all of their federal and state income taxes. If these taxes were never withheld, you and your employee need to decide who pays what.
For example, if you compromise on paying all the FICA taxes while allowing your employee to cover their federal and state income taxes, you’ll owe the FICA taxes when you file your personal income tax return and they’ll be included with the Schedule H you will file with your personal income tax return. Your employee will pay the income taxes when they file their own personal income tax return because their Form W-2 will show no income taxes were withheld.
5. Organize your tax returns
Once you figure out who is paying for each tax, get your tax returns in order. Give your caregiver their Form W-2 (although it’s past the January 31st deadline for them to receive it), file W-2 Copy A and W-3 with the Social Security Administration and get the Schedule H ready to file with your personal federal income tax return.
“By this time, if you still don’t have your state EINs, go ahead and file your late state tax returns with the phrase, “Applied For” where the form asks for the EIN,” suggests Breedlove. “Since the state will be in contact with you regarding the late returns, penalties and interest, you can update them with your state EIN when it eventually arrives.”
6. File for an extension if necessary
You can file for a six-month extension if you won’t make the April 15 deadline for filing your income tax return. You can do this with Form 4868, but the IRS may or may not honor your request. Assuming they do, you’ll have to estimate your total tax liability and pay this amount, which takes into account both your household employment taxes and your personal taxes.
If you’re reading this in April (or later)
April is a little trickier because almost all of your household employer tax deadlines have passed. If you find yourself in April without so much as an employer identification number to your name, let the IRS know you’ll be late by filing for an extension and at least paying the taxes you believe you will owe.
Remember, filing a late return doesn’t excuse you from paying late taxes. If you can’t pay, you need to ask the IRS about a payment plan or an installment agreement. The government either wants to see your return or be notified that it will be late, so state your intention clearly.
If you file late, the IRS and the state will probably assess penalties and interest. If you’re really working on good faith, didn’t know about all your responsibilities and haven’t asked for previous extensions, you might be able to get some penalties waived. You can write a letter letting them know you didn’t know about the requirements and asking if they will forgive the penalties.
If this all seems too confusing, reach out to us at HomePay, and we can handle everything for you, including calling the state for your EINs and asking them to waive penalties on your behalf.
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* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.
