Tax Tip – Reporting and Paying Employment Taxes for Household Employees

Tax Tips provided by Don Fitch, CPA

A taxpayer who has one or more household employees during the calendar year may have to file Schedule H (Form 1040), Household Employment Taxes, for that year to report FICA tax or FUTA tax for the household employees.

Who Must File Schedule H: Employers who must pay FICA tax or FUTA tax for household employees generally must report the total household employment taxes on Schedule H (Form 1040), Household Employment Taxes, and then add those taxes to their income tax on Form 1040 (Code Section 3510). Generally, an employer must withhold and pay FICA taxes for a household employee if the employer has paid the employee cash wages during the calendar year at least equal to the “domestic employee coverage threshold” in effect for that year – i.e., $1,900 for 2014 and 2015 (Notice 2013-72; 79 Federal Regulation 64455 (10/29/14)), and $2,000 for 2016 (IRS Publication 926, Household Employer’s Tax Guide). An employer must pay FUTA taxes for household employees if it has paid cash wages totaling $1,000 or more to household employees in any calendar quarter in either the current or preceding calendar year. Household employers generally are not required to withhold federal income tax from their household employees’ wages, but may agree to do so if the employee requests withholding on a completed Form W-4, Employee’s Withholding Allowance Certificate (Notice 95-18). A household employer that withholds federal income tax also must file Schedule H.

Observation: A household employer who agrees to withhold federal income tax is responsible for paying it to the IRS.

A taxpayer who is not required to file an income tax return for the tax year has the following two options for reporting FICA tax or FUTA tax for household employees:

(1) The taxpayer can file Schedule H by itself.

(2) If, besides the household employee, the taxpayer has other employees for whom the taxpayer report employment taxes on Form 941, Form 944, or Form 943 and on Form 940, the taxpayer can include the taxes for his or her household employee on those forms.

Observation: Employers that have the options listed above include certain tax-exempt organizations that do not have to file a tax return, such as churches that pay a household worker to take care of a minister’s home.

A household employer who has business employees for whom the employer reports FICA taxes on Form 941, Form 944, or Form 943, and FUTA tax on Form 940 can include the FICA and FUTA taxes for its household employees on those forms instead of filing Schedule H, and include the taxes with the federal employment tax deposits they make for their business employees. A household employer should not use Schedule H if the employer chooses to pay the employment taxes for his or her household employee with business or farm employment taxes.

Observation: An employer who reports the employment taxes for his or her household employee on Form 941, Form 944, or Form 943 should file the Form W-2 for that employee with the Forms W-2 and Form W-3 the employer files for his or her business or farm employees.

A taxpayer has a household employee if the taxpayer hired someone to do household work and that worker is the taxpayer’s employee. The worker is the taxpayer’s employee if the taxpayer can control not only what work is done, but how it is done. If the worker is the taxpayer’s employee, it does not matter whether the work is full time or part time or that the employer hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether the taxpayer pays the worker on an hourly, daily, or weekly basis, or by the job.

Example:

Roger pays Jennifer to babysit his child and do light housework four days a week in his home. Jennifer follows Roger’s specific instructions about household and child care duties. Roger provides the household equipment and supplies that Jennifer needs to do her work. Jennifer is Roger’s household employee.

Household work is work done in or around the employer’s home. Some examples of workers who do household work are:

Babysitters

Caretakers

Cleaning people

Domestic workers

Drivers

Health aides

Housekeepers

Maids

Nannies

Private nurses

Yard workers

Companion sitters

If only the worker can control how the work is done, the worker is not the taxpayer’s employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.

A worker who performs child care services for a taxpayer in the worker’s own home generally is not an employee of the taxpayer.

If an agency provides the worker and controls what work is done and how it is done, the worker is not the taxpayer’s employee.

Example:

Becky made an agreement with Brian to care for her lawn. Brian runs a lawn care business and offers his services to the general public. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are Becky’s household employees.

The IRS addressed the tax treatment of companion sitters. Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. The IRS advised that a person engaged in the trade or business of putting companion sitters in touch with individuals who wish to employ them (i.e., a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis. Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes. However, the IRS noted, a sitter not affiliated with a companion sitting placement service may be considered to be an employee (i.e., a household employee) of the individual for whom the sitting is performed, depending on whether the individual for whom the sitting is performed has the right to direct and control the sitter. The common law factors used to determine whether the relationship of employer-employee exists would be applied. If such a relationship exists, then the companion sitter would not be considered self-employed and employment tax withholdings would be the responsibility of the person receiving the companion sitting services.

A household employer must include his or her employer identification number (EIN) on the forms the employer files for his or her household employee. An EIN is a nine-digit number issued by the IRS; it is not the same as a social security number. A taxpayer ordinarily will have an EIN if he or she previously paid taxes for employees, either as a household employer or as a sole proprietor of a business. A household employer who already has an EIN should use that number. A household employer who does not have an EIN, get Form SS-4, Application for Employer Identification Number. The instructions for Form SS-4 explain how to get an EIN immediately by telephone or in about four weeks if the employer applies by mail. A taxpayer can also get an EIN over the internet.

When to File Schedule H: A household employer generally must file Schedule H with his or her federal income tax return by April 15 of the year following the year for which the schedule is being filed. If the household employer gets an extension to file his or her return, the extension also will apply to the employer’s Schedule H.

How to Make Tax Payments: When file his or her federal income tax return, the employer generally must attach Schedule H (Form 1040), Household Employment Taxes, to his or her Form 1040, 1040NR, 1040-SS, or Form 1041. The employer uses Schedule H to figure the total household employment taxes (social security, Medicare, FUTA, and withheld federal income taxes). The employer must then add those household employment taxes to his or her income tax and pay the amount due by the due date of the return.

Observation: A household employer can avoid owing tax with his or her return if the employer pays enough tax during the year to cover the employer’s household employment taxes and income tax. An can pay the additional tax by asking his or her employer to withhold more federal income tax from his or her wages during the year, asking the payer of his or her pension or annuity to withhold more federal income tax from his or her benefits, or making estimated tax payments for the year (or increasing such payments if he or she already makes estimated tax payments).

A household employer may be subject to the estimated tax underpayment penalty if he or she does not pay enough income and household employment taxes during the year (Code Section 3510(b)(1)). However, the employer will not be subject to the penalty if:

(1) the employer will not have federal income tax withheld from wages, pensions, or any other payments he or she receives; and

(2) the employer’s income taxes, excluding household employment taxes, would not be enough to require payment of estimated taxes (Code Section 3510(b)(2)).

A household employer who owns a business as a sole proprietor or whose home is on a farm operated for profit can choose either of two ways to pay his or her household employment taxes:

(1) pay them with his or her federal income tax; or

(2) include them with his or her federal employment tax deposits or other payments for his or her business or farm employees.

If an employer pays his or her household employment taxes with the employer’s business or farm employment taxes, the employer must report the household employment taxes with those other employment taxes on Form 941, Employer’s QUARTERLY Federal Tax Return, Form 944, Employer’s ANNUAL Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, and on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

Caution:

The deduction that can be taken on Schedules C and F (Form 1040) for wages and employment taxes applies only to wages and taxes paid for business and farm employees. A household employer cannot deduct the wages and employment taxes he or she pays for his or her household employees on Schedule C or F.

Correcting Schedule H: If a household employer discovers that he or she made an error on a Schedule H, the forms used to correct the error depend on whether the Schedule H was attached to another form or whether it was filed by itself.

Schedule H attached to another form: If a household employer discovers an error on a Schedule H that the employer previously filed with Form 1040, 1040NR, or Form 1040-SS, the employer must file Form 1040X and attach a corrected Schedule H. If the employer discovers an error on a Schedule H that the employer previously filed with Form 1041, the employer must file an amended Form 1041 and attach a corrected Schedule H.

An error is considered to be discovered when the employer had enough information to be able to correct the error.

The employer must write “CORRECTED” and the date he or she discovered the error in the top margin of the corrected Schedule H, in dark, bold letters. The employer also must explain the reason for the correction and the date the error was discovered in Part C of Form 1040X or in a statement attached to the amended Form 1041.

Schedule H filed by itself: If a household employer discovers an error on a Schedule H that he or she filed as a stand-alone return, the employer must file another stand-alone Schedule H with the corrected information.

The employer must write “CORRECTED” and the date he or she discovered the error in the top margin of the corrected Schedule H in dark, bold letters. The employer also must explain the reason for the correction and the date the error was discovered in Part II of Form 1040X or in a statement attached to the corrected Schedule H. If the employer has an overpayment, he or she also must write “ADJUSTED” or “REFUND” in the top margin, depending on whether he or she wants to adjust the overpayment or claim a refund.

A household employer must file a corrected Schedule H when he or she discovers an error on a previously filed Schedule H. If correcting an underpayment, the employer must file a corrected Schedule H no later than the due date of his or her next tax return (generally, April 15 of the following calendar year) after discovering the error. If correcting an overpayment, the employer must file a corrected Schedule H within the refund period of limitations (generally three years from the date the original form was filed or within two years from the date the employer paid the tax, whichever is later).

Underpayment: A household employer must pay any underpayment of social security and Medicare taxes by the time he or she files the corrected Schedule H. Generally, by filing on time and paying by the time the employer files his or her the return, the employer will not be charged interest (and will not be subject to failure-to-pay or estimated tax penalties) on the balance due. However, underreported FUTA taxes will be subject to interest.

Overpayment: A household employer may either adjust or claim a refund of an overpayment of social security and Medicare taxes on a previously filed Schedule H. However, if the employer is correcting an overpayment and is filing the corrected Schedule H within 90 days of the expiration of the period of limitations, he or she can only claim a refund of the overpayment.

Under the adjustment procedure, if the corrected Schedule H is filed with a Form 1040X or an amended Form 1041, the employer adjusts the return by indicating on the appropriate line of the Form 1040X or the Form 1041 that he or she would like the overpayment applied to his or her estimated taxes on Form 1040, Form 1040NR, Form 1040-PR, Form 1040-SS, or Form 1041 for the year in which the employer is filing the corrected Schedule H. If the corrected Schedule H is filed as a stand-alone return, the employer adjusts the return by writing “ADJUSTED” in the top margin in dark, bold letters. If the employer adjusts the return, he or she will not receive interest on the overpayment. If the corrected Schedule H will be filed within 90 days of the expiration of the refund period of limitations, the employer cannot adjust the return and must claim a refund for the overpayment. The employer cannot adjust his or her return to correct overpayments of FUTA tax.

Under the claim for refund process, if the corrected Schedule H is filed with a Form 1040X or an amended Form 1041, the employer claims a refund by indicating on the appropriate line the Form 1040X the Form 1041that he or she would like the overpayment refunded. If the corrected Schedule H is filed as a stand-alone return, the employer claims a refund by writing “REFUND” in the top margin in dark, bold letters. The employer will receive interest on any overpayment refunded, unless the overpayment is for FUTA tax because the employer was entitled to increased credits for state contributions.

If the household employer previously overreported social security and Medicare taxes, the employer may adjust the overpayment only after he or she has repaid or reimbursed the household employees in the amount of the overcollection of employee tax. An employer reimburses his or her employees by applying the overwithheld amount against taxes to be withheld on future wages. The employer may claim a refund for the overpayment only after he or she has repaid or reimbursed his or her employees in the amount of the overcollection or has obtained consents from the employees to file the claim for refund for the employee tax. The employer must include a statement that he or she has repaid or reimbursed the employees, or obtained their written consents in the case of a claim for refund, in Part C of Form 1040X or in a statement attached to the amended Form 1041 or the stand-alone corrected Schedule H.

Example:

Wendy has a household employee and timely filed her 2020 Form 1040 with an attached Schedule H (Form 1040) on April 8, 2021, and timely paid all income and employment taxes reported on the return. On April 18, 2022, Wendy discovers that she overwithheld and overpaid FICA tax on wages paid to her household employee on her 2020 return. Wendy can choose between the adjustment and refund claim processes to correct the overpayment on her 2020 return because the error was discovered more than 90 days before the expiration of the period of limitations on credit or refund. Regardless of the process chosen, Wendy must make the correction by filing Form 1040X and attaching a corrected Schedule H (Form 1040). If Wendy chooses the refund claim process, the Form 1040X with the corrected Schedule H (Form 1040) must be filed by April 15, 2024. However, if she chooses the adjustment process, the Form 1040X with the corrected Schedule H must be filed by January 15, 2024, under the 90 day rule. If Wendy chooses the adjustment process, she must repay or reimburse her employee in the amount of the overcollection before filing the Form 1040X with the attached corrected Schedule H (Form 1040). She can then adjust his return by indicating on the appropriate line of the Form 1040X that she wants the overpayment applied as a payment of estimated taxes on Form 1040, for the year in which the corrected Schedule H (Form 1040) is filed. If Wendy chooses the refund claim process, she must either repay or reimburse her employee in the amount of the overcollection or obtain the employee’s consent to file the claim for refund for the employee tax. She can then claim a refund by indicating on the appropriate line of the Form 1040X that she wants the overpayment refunded. The overpayment will be refunded, plus any interest that applies, unless Wendy owes other taxes, penalties, or interest (Revenue Ruling 2009-39).

Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.

DON FITCH, CPA
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Palm Desert, CA 92260

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This blog post is intended to serve solely as an aid in continuing tax education for Don Fitch Accountancy blog, podcast, and/or email members. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any federal tax, accounting opinion, tax return position, and must be supplemented for such purposes with other current authoritative materials. The information in this blog post has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Don Fitch Accountancy is not engaged in rendering legal or other professional services and will not be held liable for any actions or suits based on this blog post, podcast, and/or email, or comments made during the above presentation. If legal advice or other expert assistance is required, seek the services of a competent professional.

(Updated 03/02/2021 06:58)

Published by Don Fitch, CPA

Offers in Compromise, Wage Levy Releases, Installment Agreements, IRS Audits, and much more IRS assistance. Also, allow us to Help you complete your Tax Returns from 1913 to present (100+ Years) and for any of the 50 States.

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