Tax Situations When Caring For A Family Member

Navigating Work-Life Balance

Families often hire individuals to care for children and dependents in their home so the family members can work or actively look for work. These individuals include babysitters, caretakers, health aides, nannies, private nurses, and au pairs.

As employers, family members have additional tax responsibilities for their household employees.

Social Security And Medicare Taxes

Both the employee and employer pay Social Security and Medicare taxes (commonly called FICA). This applies if an employer pays cash wages of $2,100 or more to any one household employee.

For FICA, both the employer and the employee pay to the IRS 7.65% of wages paid – 6.2% for Social Security and 1.45% for Medicare taxes. An employer generally must withhold the employee’s share of FICA tax from their wages.

Employers generally do not withhold or pay FICA taxes on wages they pay to their spouse, a child under age 21, a parent, or an employee under age 18 unless performing household work is their principal occupation.

But, they still need to report the compensation on a Form W-2, Wage and Tax Statement.

Withholding additional Medicare tax of 0.9% applies when an employer pays wages greater than $200,000 to an employee.

Federal Income Tax Withholding

Employers don’t need to withhold federal income tax from wages they pay to a household employee unless the employee asks them to and the employer agrees.

The employee will need to complete a Form W-4, Employee’s Withholding Allowance Certificate, for their employer.

The Tax Withholding Estimator on IRS.gov is a useful tool to help determine the right amount of tax to withhold from the paycheck. The estimator automatically links to Form W-4, which the employee can fill out and submit to their employer.

Employers who must withhold and pay Social Security and Medicare taxes or withhold federal income tax need to complete Form W-2 for each employee.

They also need to complete a Form W-3, Transmittal of Wage and Tax Statement.

Federal Unemployment Tax Act (FUTA)

Employers who paid cash wages to household employees totaling more than $1,000 in any calendar quarter during the calendar year, or the preceding calendar year, generally must pay FUTA tax on the first $7,000 of cash wages paid to each household employee.

But, wages paid to a parent, spouse, or child under the age of 21 don’t count.

Generally, employers can take a credit against their FUTA tax liability for amounts they paid into state unemployment funds. If they paid wages subject to the unemployment compensation laws of a credit reduction state, they may have a reduced FUTA tax credit.

Reporting Household Employee Tax Information

Individuals who pay wages subject to FICA tax, FUTA tax, or if they withhold federal income tax from their employee’s wages, need to file Schedule H (Form 1040), Household Employment Taxes.

A sole proprietor must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and Form 941, Employer’s QUARTERLY Federal Tax Return, or Form 944, Employer’s ANNUAL Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.

Additional household employee tax information with the information for other employees may be reported on these forms instead of on Schedule H.

Those who file Schedule H with their Form 1040 can avoid owing additional taxes by paying enough tax before filing to cover both employment taxes for their household employee and their income tax.

To do this, make estimated tax payments to the IRS during the year using Form 1040-ES, Estimated Tax for Individuals.

Also, those who are employed can ask their employer to withhold more federal income tax from their wages during the year to cover both employment taxes for their household employee and their own income tax liability.

Those who fail to pay household employment taxes during the year may owe an estimated tax underpayment penalty.

Hiring Au Pairs

Some families hire au pairs to carry out childcare functions. An au pair is always admitted into the United States on a J-1 visa. The au pair stipend constitutes “wages” because an employer-employee relationship exists between the au pair and their host family. Because au pairs include wages in gross income and need to file U.S. individual income tax returns, they need to apply for a U.S. Social Security number.

Au pair wages are not usually subject to Social Security and Medicare taxes because of the au pair’s status as a J-1 nonimmigrant and as a nonresident alien. But, if the au pair had previously been in the United States as a student, teacher, trainee, or researcher in F, J, M, or Q nonimmigrant status, then the au pair might be a resident alien during their current stay in the United States. In this situation, although dollar thresholds apply, the host family must withhold Social Security and Medicare taxes and pay federal unemployment tax.

Credit For Child And Dependent Care

If you paid someone to care for a child or a dependent so you could work, you may be able to reduce your federal income tax by claiming the Credit for Child and Dependent Care expenses on your tax return.

Please contact your tax professional for assistance in sorting out your tax situation if you hire an individual to provide care for a family member.