Recently I hired a nanny to help watch my kids while I work from home. This was new for me, and I wasn’t quite sure how to go about paying her. All I knew was that paying “under the table” or without either of us documenting her salary was sketchy at best, and illegal at worst. Not wanting to tangle with the IRS or owe them any more than I already have to, I started researching the best way to stay above-board while being fair all around*.
Now, just a few days later, I have an automated payroll system, plus direct-deposit and tax-withholding accounts. Remember, I had no idea how to get or manage any of these things before I became a household employer. And if I can do it, trust me -- you can, too!
(*Always consult with your tax pro about anything IRS-related to confirm all the answers you need for your business. I’m sharing what I learned based on my recent, first-hand experience going through the household employer process. )
Here’s what you need to know, broken down into eight (relatively) simple steps.
1. Define who is an “employee”
Did you know that if you pay someone to do a job within a specific space (i.e., your house), for a specific span of hours and give them specific instructions on how to do that job, then that person is your employee? Yep -- and it doesn’t matter whether that person works part-time or full-time.
By contrast, an example of someone who works at my home but is not my employee is a landscaper. My guy comes when it fits his schedule, and he determines what work needs to be done. I don’t tell him what to do beyond, “Make the yard look nice.”
So congratulations on becoming an employer -- and welcome to the world of taxes and federal and state withholdings.
2. Get an EIN from the IRS
Of course, now you have to get official. The IRS recognizes that household employers are individuals submitting taxes on behalf of someone else (we’ll get to that later). To submit these taxes, an employer needs an EIN or Employer Identification Number. I applied for an EIN online at the IRS website, and I got it instantly after completing a quick form. (Note: you may already have an EIN if you are a Sole Proprietor. If so, you can use that one.)
3. Report your new hire to the state
States require that every new hire be reported to the state’s new hire registry. The purpose of this is to: a) track and collect child support payments when required, and b) prevent unemployment insurance fraud.
4. Do your paperwork ... lots of it
Next you need to determine if your new employee can legally work in the United States. You will both need to fill out Form I-9, Employment Eligibility Verification. Your employee will also need to show you legal proof of their eligibility to work in the US -- driver’s license, passport, birth certificate, visa, etc -- acceptable documents are listed on the form. You won’t need to file this form with the government, but keep it on hand for three years during employment or for one year beyond the employee’s termination.
I also asked my employee to fill out a Form W-4 with her full name, SSN and tax withholdings so I would have that info for payroll. The last piece of paper I had her fill out was an authorization for direct deposit form – this let me know where to put her money each pay period and gave me permission to access her bank account(s).
5. Withhold federal taxes – yes or no?
If you plan to pay your employee more than $2,100 cash wages within the 2018 tax year, then you need to
withhold *set aside your half of your employee's Medicare and Social Security taxes. As the employer, your share of these taxes is 7.65% of their wages. Your employee also needs to contribute the same percentage from their wages for a total of 15.3% of every paycheck. *Your share is in addition to the wages paid to your employee, while their share is withheld from their paycheck.
(By the way, if your household employee happens to be: a) your spouse, b) your child under age 21, c) any child under 18, or d) your parent, then you have a different set of federal tax guidelines to check out, and you may not have to pay employment tax on these wages. See “Table 1” in IRS Publication 926: Household Employer’s Tax Guide.)
I also pay Federal Unemployment Tax (FUTA) on my employee (6% of up to $7,000 of paid wages/year), and I withhold her Federal Income Tax for her. The following five taxes are collectively and colloquially called “Nanny Taxes:”
My nanny asked me to withhold her portion of taxes, so I created a separate bank account to stash away each of our myriad taxes until they are due. I found a great calculator online that does all the tax math for you based on which state you live in, the amount you pay your employee and their filing status.
6. Withhold state taxes, workers comp, etc – yes or no?
If your state collects income tax, you also may choose to withhold those taxes for your employee. I happen to live in Washington, a state without income tax, so this isn’t a concern for me. However, I do need to set aside a portion of my own money to pay for workers’ compensation, also known as disability/unemployment insurance. Each state sets their own rates.
Check out this handy round-up of state-by-state requirements for tax and payroll questions.
Click here to see a visual breakdown of payments and tax withholdings in Washington (where there’s no income tax) and California (hello, income tax).
7. Set up payroll
This is the step where it all starts to get easier, I promise. You’ve got the taxes figured out, so now you have to pay your employee and provide them a pay stub. How do you do that? You could hire a payroll service – you’ll find plenty of options online by searching on “nanny payroll.”
Good news is, these services will calculate all the taxes and withholdings, and even submit to the IRS for you. Bad news? You’ll pay anywhere from $35/month to $3000 or more per year. The other option, of course, is to do most of the work yourself. I opted for the latter. Why pay a lot of money to someone to pay someone else?
I use Intuit Payroll’s most basic service to generate paychecks and pay stubs for $20/month. (You can use this platform with or without QuickBooks.) There are higher levels of service, too, for a higher fee – say, if you want to have taxes submitted on your behalf and Schedule H or W-2s and W-3s automatically generated.
Note: With a single employee, I figured I didn’t need to pay extra to file a couple forms, but I can definitely appreciate the convenience factor if you employ a number of people.
I set up direct deposit for my nanny via Intuit Payroll. Now, each week, I input her hours two days before payday, approve the invoice and, on payday, I hand her a paper pay stub (which she can also access online). The money goes directly into her account from one of my accounts on the day I specify. Easy peasy! (You also have the option to write a check, print onto a check and even split payment between accounts.)
8. Submit tax payments and provide forms
All those taxes you’ve been stashing away each pay period need to be submitted at some point. Quarterly estimated payments help you avoid a potential underpayment penalty when you pay all at once on tax day.
Key dates to remember:
That’s it. Whew!
I must admit, there were moments it seemed crazy to put this much effort into being able to work for myself. But as every self-employed person knows, in the end -- when all the paperwork is filed, the employees paid, the records sorted and the taxes filed on time –- this extra effort allows us to do the work we love. Put it that way, and it seems like a pretty small price to pay.
Household Employer’s Tax Guide via IRS
Unemployment Insurance Info by State via US Dept of Labor
Employment Tax & Payroll Question Round-Up via QB Community
Before you go
QB Community members, have you hired a household employee? If you have employees at your small business, what tips can you share for keeping payroll and taxes organized?
5. then you need to withhold your half of Medicare and Social Security.
Wrong, you as an employer withhold from employee but your share is above the wages, it is not withheld from anything. You add it to Payroll Liabilities the day of payroll and submit it electronically along with what you withheld from the employee.
And please do not forget Local Income Tax and and Local Services Tax if any.
For household employees the deduction of FWT (Federal Withholding Tax) is optional, unlike regular business employees but the state and local might not be.
You are correct, that sentence was worded poorly. I should have said that the employer sets aside half of the total Social Security and Medicare while withholding the employee's other half. This is an amount paid by the employer in addition to wages.
Yes, good reminder to check your local tax requirements. Here is a handy state-by-state tool for determining new employer obligations at the federal, state and local levels.