In the United States, the Internal Revenue Code requires that taxpayers who hire a household employee pay employment taxes to the federal government. This tax is commonly referred to as the "nanny tax" but covers a wide range of potential household employees who are not otherwise categorized as independent third-party contractors.
Types of Household Employees
Although household employees are most commonly associated with child care providers, such as nannies, the Internal Revenue Service (IRS) considers a wide range of service providers as falling under the umbrella of household employees and expose the hiring taxpayer to liability for household employment taxes. These service providers include gardeners, cleaning personnel or maids, babysitters, housekeepers, private nurses or home health aids and drivers or chauffeurs. For purposes of household employment taxes, it does not matter whether these workers are employed full-time or part-time.
Household Employee or Independent Contractor
Taxpayers hiring household employees are liable for payment of additional employment taxes, while taxpayers hiring independent contractors are not. (In the case of independent contractors, workers are required to file and pay the employment taxes themselves.) The key determinant in whether a worker is considered a household employee or an independent contractor for IRS purposes is the degree of control afforded the worker in accomplishing the assigned tasks. Unfortunately, there is no hard and fast rule for determining the level of control that constitutes a household employee, and it is often decided on a case-by-case basis.
In general, a child care provider who operates a formal child care facility where a taxpayer leaves a child each morning would be considered an independent contractor. Conversely, a child care provider hired to come to the taxpayer's house each day and stay with a child would generally be considered a household employee. As another example, a landscaper that comes periodically to a home to cut the lawn is typically an independent contractor, while a gardener that a taxpayer requires to be at a home for a set period of time to perform various tasks would typically be a household employee.
Taxpayers subject to household employment taxes must file Schedule H, Household Employment Taxes, with the IRS when completing their annual individual income tax return, IRS Form 1040. On this form, the taxpayer computes all social security, Medicare and federal unemployment taxes accruing as a result of wages paid to the household employees. These taxes are then paid as additional tax liability when the taxpayer files Form 1040.
Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.