Do you have household employees? Do you know if they should be setup as W-2 employees? The first step is to determine which of your household help are considered household employees and which are contractors. The key is to determine who controls what and how the work is done. Examples of independent contractors who are NOT considered household employees would include:
- A housekeeper who owns or works for a business. They bring their own cleaning supplies and have other clients in addition to you.
- A lawn-care business who again does the work with their own tools and/or supplies and has multiple clients.
The most common type of household employees who should be setup as W-2 employees are nannies, au pairs, or other in-home care providers. With these household employees, you as the employer decided when and how they perform the work. The care provider you have hired is expected to be available when you need them and for the specified time frame that you determine. They are also expected to care for the child/children/person in a way that you have specified. You as the employer determine when and what they provide for meals, how discipline is handled, etc. Therefore, these workers are considered household employees and should be treated as such for tax purposes.
Once you have determined that you do in fact have a household, what should you do next?
Obtain an employer identification number and register with the appropriate tax agencies
You will need to apply for an employer identification number (EIN or FEIN). This will be different than your social security number. An EIN can be applied for by completing a federal form SS-4, Application for Employer Identification Number. This form is available at any IRS or Social Security Administration office or online at www.irs.gov
Apply for all necessary state tax accounts
Each state has different tax filing requirements. In Colorado, each employer must obtain a Colorado Withholding Tax account and a state unemployment insurance account. These accounts can be applied for at the same time by properly completing an online application from the Department of Revenue website by clicking here.
Determine who will process your payroll
There are dozens of options to choose from. Many 3rd party payroll providers (MyPay, ADP, Paychex) will process your household employee payroll for you. There are also many programs that will allow you to manually process your regular paychecks for your employee(s) and help you file your own quarterly state tax returns. You can also hire an accounting or CPA firm (such as Lippa & Associates) to take care of your payroll needs. Whichever route you decide to take, it is important to be clear as to who is responsible for filing and the quarterly tax returns and making the corresponding payments.
Ensure that the federal tax payments are reported and included on your annual individual tax return
The payroll taxes including Social Security, Medicare and Federal Unemployment are reported and paid on Schedule H of your individual tax return. Federal withholding is included in the reporting and payment as well.
If you have a household employee it is imperative that you have either a payroll company or trusted tax adviser to ensure that all of your reports and payments are made by their deadlines. Taxing agencies do charge late filing and payment penalties and interest on delinquent accounts.
Give Lippa & Associates a call today to discuss your payroll needs!
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