When it comes to taxes, the tiniest of details can be the difference between smooth sailing and a giant headache. The wrong form or classification can lead to months of back-and-forth with the IRS, not to mention potential penalties and fees. One thing can potentially cause problems is using Forms 940 and 941 to file household employment taxes, instead of Form 1040. This sometimes happens when a payroll or accounting firm that is used to working for businesses, rather than individuals, files your taxes, as Forms 940 and 941 are meant for business tax returns.
What is the difference between 940 and 941?
Businesses use Form 941 to send in taxes to the IRS on a quarterly basis. Specifically, those taxes are the Social Security, Medicare and federal income taxes withheld from a company’s employees, as well as the Social Security and Medicare taxes owed by the company. Form 940 is used once per year to remit federal unemployment insurance taxes.
“Families who hire household employees are also required to withhold and pay these same taxes,” says Tom Breedlove, Sr. Director of Care HomePay. “You can see why it’s easy to think filing Form 940 and Form 941 would be the right course of action to report your household employment taxes, but that’s not the course of action the IRS recommends.”
How should families report and pay their household employment taxes to the IRS?
According to IRS Publication 926, families who hire household employees must report federal taxes related to household employment activity using a Schedule H that they attach to their personal income tax return. Those tax are:
Social Security taxes paid and withheld from their caregiver.
Medicare taxes paid and withheld from their caregiver.
Federal income taxes withheld from their caregiver.
Federal unemployment insurance taxes paid.
Throughout the year, the IRS recommends families use the 1040 Estimated Payment schedule to regularly pay these federal taxes rather than wait until tax time. This is to ensure families are not assessed underpayment penalties. Estimated tax payments are due in April, June, September and January (of the following year).
The IRS does make an exception for families with a sole proprietor business that file Form 941 to report taxes for their business employees. In this case, taxes for their household employees may also be included on Form 941.
What can happen if household employment taxes are reported with Form 941 and 940?
When you file your personal income tax return, the online software you use or your tax preparer will most likely attempt to file a Schedule H because you had a nanny or senior caregiver working for you. And since the Schedule H is reconciled on your personal income tax return, but you haven’t made estimated tax payments, the IRS may think you owe all the taxes that are totaled on your Schedule H. This can potentially be thousands of dollars.
But what about the money sent in with Form 941 and Form 940? “The IRS thinks these tax returns and payments should be attributed to a business, so sometimes they’re not able to make the connection between them and your personal income tax return,” adds Breedlove. “So unless you catch that there has been a mistake after a Schedule H is generated, it’s common to unfortunately pay the taxes that the IRS says are due — meaning you’ve now double-paid your household employment taxes.”
Is there a way to fix this mistake if it happens?
Yes, but it requires some work and time dealing with the IRS. You can file Form 941-X to amend those business tax returns to $0, so you can recoup the federal taxes that were incorrectly remitted. If you use HomePay for your household employment taxes and payroll moving forward, we’ll actually take care of this process for you.
It’s important to remember that household employment adheres to a unique section of the IRS’ tax code. So when you hire a nanny, senior caregiver or other household employee, make sure you consult with a specialist before you begin managing payroll. It’s much easier avoiding problems from the start than cleaning up a tax mess later.
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