Home > Consulting, Entrepreneurs, Taxes > Household Employee and the Nanny Tax

Household Employee and the Nanny Tax

September 12, 2013
Household staff of the Hughes family, c.1890s

Household staff of the Hughes family, c.1890s (Photo credit: Wikipedia)

If you employ someone to work for you around your house, it is
important to consider the tax implications of this arrangement. While
many people disregard the need to pay taxes on household employees, they
do so at the risk of paying stiff tax penalties down the road.

As you will see, the rules for hiring household help are quite
complex, even for a relatively minor employee, and a mistake can bring
on a tax headache that most of us would prefer to avoid.

Who Is a Household Employee?

Commonly referred to as the “nanny tax”, these rules apply to you
only if (1) you pay someone for household work and (2) that worker is
your employee.

  1. Household work is work that is performed in or around your
    home by baby-sitters, nannies, health aides, private nurses, maids,
    caretakers, yard workers, and similar domestic workers.
  2. A household worker is your employee if you control not only what work is done, but how it is done.

    If the worker is your employee, it does not matter whether the work
    is full-time or part-time, or that you hired the worker through an
    agency or from a list provided by an agency or association. It also does
    not matter whether you pay the worker on an hourly, daily, or weekly
    basis, or by the job.

    If the worker controls how the work is done, the worker is not your
    employee, but is self-employed. A self-employed worker usually provides
    his or her own tools and offers services to the general public in an
    independent business.

    Also, if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

Example: You pay Betty to baby-sit
your child and do light housework four days a week in your home. Betty
follows your specific instructions about household and child care
duties. You provide the household equipment and supplies that Betty
needs to do her work. Betty is your household employee.

Example: You pay John to care for
your lawn. John also offers lawn care services to other homeowners in
your neighborhood. He provides his own tools and supplies, and he hires
and pays any helpers he needs. Neither John nor his helpers are your
household employees.

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