New Law Eases Burden for Household Employers

Recently enacted law changes mean that many household employers who previously were required to file quarterly reports with the IRS will no longer have to report employment taxes for their household employees.

Before these changes, anyone who paid a household employee wages of more than S50 in a quarter was required to file a quarterly report and pay Social Security and Medicare taxes on those wages. The quarterly filing and payment requirements have been eliminated by the new law, and the $50 per quarter threshold has been raised to $1,000 per year (an amount that will be indexed for inflation beginning in 1996).

Because the $1,000 threshold is effective for the entire 1994 year, household employers and their employees who paid Social Security and Medicare taxes on 1994 employee wages of less than $1,000 are eligible for refunds. Employers can obtain their refunds with interest by filing Form 843, "Claim for Refund and Request for Abatement." Alternatively, employers who file a fourth quarter Form 942, "Employer's Quarterly Tax Return for Household Employees, " can reduce their liability on that return by the amount of any overpaid household employment taxes. In December, the fourth-quarter Form 942 package will be mailed to employers; this package will contain special instructions and a simplified version of the Form 843 for use in claiming refunds.

Employees should request reimbursement from their employers for any Social Security and Medicare taxes withheld from their pay However, employees who are unable to obtain refunds of these taxes from their employers can obtain them by filing the Form 843 and attaching a copy of their Form W-2, "Wage and Tax Statement " Employees can obtain a simplified version of the Form 843 after January 1 by calling 1-800-TAX-FORM Also, Publication 926, "Employment Taxes for Household Employers," and Publication 553, "Highlights of 1994 Tax Changes," will provide more details on how employees can file for their refunds.

Employees who receive refunds will nevertheless receive Social Security wage credits on their 1994 wages To ensure proper posting of these credits, the new law requires employers, for 1994 only, to issue a Form W-2 to household employees who were paid more than $50 in any quarter The fourth-quarter 942 package and Publication 926 will contain special instructions for preparing these Form W-2s.

Effective in 1995, the law exempts household employment by workers under the age of 18 from any Social Security and Medicare of how much they earn, unless household employment is the worker's principal occupation.

For 1994, household employers must continue to file the quarterly Forms 942 for any household employees earning more than the new $1000 threshold. For the 1995 tax year, however, household employers will use their Form 1040 income tax returns to report Social Security, Medicare, and Federal Unemployment (FUTA) taxes, as well as any income taxes withheld, for their household employees. The IRS will be developing a new schedule for reporting these taxes on the 1995 Form 1040.

While the new law simplifies the reporting and payment of household FUTA tax by permitting it to be reported on the employer's Form 1040 beginning in 1995, it does not affect the wage thresholds for determining an employer's liability for FUTA. Household employers also need to keep in mind that the new law does not directly affect any state unemployment tax filing requirements; thus, household employers may still be subject to quarterly filing requirements for these state taxes.

Finally, under the new law, household employers are not required to make household employee Social Security, Medicare, and FUTA tax payments throughout the year until 1998. They are encouraged, however, to either increase their withholding or make estimated payments to avoid when they file their income tax returns. Beginning in 1998, withholding or estimated tax payments must be sufficient to cover these taxes; underpayments beginning in 1998 could be subject to estimated tax penalties.

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