Do You Need To Pay Employment Taxes?

If you have a household employee, you may need to withhold and pay social security and Medicare taxes, or pay federal unemployment tax, or both. To find out, read Table 1.

You do not need to withhold federal income tax from your household employee's wages. But if your employee asks you to withhold it, you can. See Do You Need To Withhold Federal Income Tax?, later.

If you need to pay social security, Medicare, or federal unemployment tax or choose to withhold federal income tax, read Table 2 for an overview of what you may need to do.

If you do not need to pay social security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, read State employment taxes, next. The rest of this publication does not apply to you.

State employment taxes. You should contact your state unemployment tax agency to find out whether you need to pay state unemployment tax for your household employee. For the address and phone number, see the Appendix. You should also find out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance.

Table 2

Social Security and Medicare Taxes

The social security tax pays for old-age, survivors, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance.

Both you and your household employee may owe social security and Medicare taxes. Your share is 7.65% (6.2% for social security tax and 1.45% for Medicare tax) of the employee's social security and Medicare wages. Your employee's share is the same.

You are responsible for payment of your employee's share of the taxes as well as your own. You can either withhold your employee's share from the employee's wages or pay it from your own funds. If you decide to pay the employer's share from your own funds, see Not withholding the employee's share, later. Pay the taxes as discussed under How Do You Make Tax Payments?, later. Also, see What Forms Must You File?, later.

Social security and Medicare wages. You figure social security and Medicare taxes on the social security and Medicare wages you pay your employee.

If you pay your household employee cash wages of $1,300 or more in 2001, all cash wages you pay to that employee in 2001 (regardless of when the wages were earned) are social security and Medicare wages. However, any noncash wages you pay do not count as social security and Medicare wages.

If you pay the employee less than $1,300 in cash wages in 2001, none of the wages you pay the employee are social security and Medicare wages, and neither you nor your employee will owe social security or Medicare tax on those wages.

State disability payments treated as wages. Certain state disability plan payments that your household employee may receive are treated as social security and Medicare wages. For more information about these payments, see the instructions for Schedule H (Form 1040), Household Employment Taxes, and the notice issued by the state.

Wages not counted. Do not count wages you pay to any of the following individuals as social security and Medicare wages, even if these wages are more than $1,300 during the year.

1. Your spouse.
2. Your child who is under age 21.
3. Your parent. Exception: Count these wages if both the following conditions apply.
   1. Your parent cares for your child who lives with you and either is under age 18 or has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter.
   2. You are divorced and have not remarried, or you are a widow or widower, or you are living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.

4. An employee who is under age 18 at any time during the year. Exception: Count these wages if providing household services is the employee's principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Also, if your employee's cash wages reach $80,400 in 2001, do not count any wages you pay that employee during the rest of the year as social security wages to figure social security tax. (But continue to count the employee's cash wages as Medicare wages to figure Medicare tax.)

If you reimburse your employee for the amount paid for transit passes used to commute to your home, do not count the reimbursement (up to $65 per month) as wages. A transit pass includes any pass, token, farecard, voucher, or similar item entitling a person to ride on mass transit, such as a bus or train.

If you reimburse your employee for the amount paid for parking at or near your home or at or near a location from which your employee commutes to your home, do not count reimbursement (up to $180 per month) as wages.

Cash wages. Cash wages include wages you pay with checks, money orders, etc. Cash wages do not include the value of food, lodging, clothing, and other noncash items you give your household employee. However, cash you give your employee in place of these items is included in cash wages.

Withholding the employee's share. You should withhold the employee's share of social security and Medicare taxes if you expect to pay your household employee cash wages of $1,300 or more in 2001. However, if you prefer to pay the employee's share yourself, see Not withholding the employee's share, next.

You may withhold the employee's share of the taxes even if you are not sure your employee's cash wages will be $1,300 or more in 2001. If you withhold the taxes but then actually pay the employee less than $1,300 in cash wages for the year, you should repay the employee.

Withhold 7.65% (6.2% for social security tax and 1.45% for Medicare tax) from each payment of social security and Medicare wages. You can use Table 3, later, to figure the proper amount to withhold. Instead of paying this amount to your employee, you will pay it to the IRS with a matching amount for your share of the taxes. Do not withhold any social security tax after your employee's social security wages for the year reach $80,400.

If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

Example. You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,300 or more for the year. You should withhold $7.65 from each $100 wage payment and pay your employee the remaining $92.35. The $7.65 is the sum of $6.20 ($100 x 6.2%) for your employee's share of social security tax and $1.45 ($100 x 1.45%) for your employee's share of Medicare tax. Match the $7.65 you withhold with $7.65 from your own funds when you pay the taxes.

Not withholding the employee's share. If you prefer to pay your employee's social security and Medicare taxes from your own funds, you do not have to withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.

Example. You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,300 or more for the year. You decide to pay your employee's share of social security and Medicare taxes from your own funds. You pay your employee $100 every Friday without withholding any social security or Medicare taxes. For each wage payment you will pay $15.30 when you pay the taxes. This is $7.65 ($6.20 for social security tax + $1.45 for Medicare tax) to cover your employee's share plus a matching $7.65 for your share. For income tax purposes, your employee's wages each payday are $107.65 ($100 + the $7.65 that you will pay to cover your employee's share of social security and Medicare taxes).

Federal Unemployment (FUTA) Tax

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Like most employers, you may owe both the federal unemployment tax (the FUTA tax) and a state unemployment tax. Or, you may owe only the FUTA tax or only the state unemployment tax. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency. See the list of state unemployment agencies in the Appendix for the address.

The FUTA tax is 6.2% of your employee's FUTA wages. However, you may able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax of 0.8%. But your credit for 2001 is limited unless you pay all the required contributions for 2001 to your state unemployment fund by April 15, 2002. The credit you can take for any contributions that you pay for 2001 after April 15, 2002, is limited to 90% of the credit that would have been allowable if the contributions were paid on or before April 15, 2002.

Credit for 2000 FUTA tax. If you had a household employee in 2000, you may be able to take the credit of up to 5.4% against the FUTA tax on your 2000 tax return. But your credit is limited unless you pay all the required contributions for 2000 to your state unemployment fund by April 16, 2001. The credit you can take for any contributions that you pay for 2000 after April 16, 2001, is limited to 90% of the credit that would have been allowable if the contributions were paid on or before April 16, 2001.

You must complete the following worksheet to figure the credit for late contributions.

Worksheet

Pay the tax as discussed under How Do You Make Tax Payments?, later. Also, see What Forms Must You File?, later.

Do not withhold the FUTA tax from your employee's wages. You must pay it from your own funds.

FUTA wages. Figure the FUTA tax on the FUTA wages you pay. If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2001, the first $7,000 of cash wages you pay to each household employee in 2001 and 2002 is FUTA wages. (A calendar quarter is January through March, April through June, July through September, or October through December.) If your employee's cash wages reach $7,000 during the year, do not figure the FUTA tax on any wages you pay that employee during the rest of the year. For a discussion of "cash wages," see Cash wages, earlier.

If the cash wages you pay are less than $1,000 in each calendar quarter of 2001, but you had a household employee in 2000, the cash wages you pay in 2001 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2000 totaled $1,000 or more.

Wages not counted. Do not count wages you pay to any of the following individuals as FUTA wages.

• Your spouse.
• Your child who is under age 21.
• Your parent.

Example. You hire a household employee (who is not related to you) on January 1, 2001, and agree to pay cash wages of $200 every Friday. During January, February, and March you pay the employee cash wages of $2,600. Because you pay cash wages of $1,000 or more in a calendar quarter of 2001, the first $7,000 of cash wages you pay the employee (or any other employee) in 2001 or 2002 is FUTA wages. The FUTA wages you pay may also be subject to your state's unemployment tax.

During 2001, you pay your household employee cash wages of $10,400. You pay all the required contributions for 2001 to your state unemployment fund by April 15, 2002. Your FUTA tax for 2001 is $56 ($7,000 x 0.8%).

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