Q1 My worker wants to pay her own taxes and says she is an "independent contractor."
Q2 I've recently hired a household worker for the first time. What should I do now?
Q3 I've been paying my worker in cash and not paying taxes. What should I do now?
Q4 How much will the penalties and interest be?
Q5 OK, I'm going to register and file and pay for this year, but what do I do about the taxes I did not deduct from the worker's pay earlier this year?
Q6 What do you mean by "gross-up?"
Q7 Why does your calculator do "employment tax gross-up" but not "income tax gross-up?"
Q8 Should the employer withhold income taxes from the household worker's wages?
Q9 Do I report taxes for our au pair?
Q10 Can I deduct employer taxes on my income tax return?
Q11 Do I really need the Form I-9, eligibility verification?
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My worker wants to pay her own taxes and says she is an "independent contractor."
Saying that a worker is an independent contractor not an employee does not make any difference. Neither does a written contract or agreement to that effect.
The governing principles are the actual relationship between the employer and the worker. If it fits the definition of an employer/employee relationship, then the employer is liable for employment tax filing and payment.
If you fail to withhold and pay employment taxes as required, and the worker does not pay her taxes, then you as the employer are liable for both the employer's and the worker's portions of the taxes and all penalties and interest.
See our home page for definitions and exclusions for help in determining if you are a household employer.
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I've recently hired (.......am just about to hire.......) a household worker for the first time. What should I do now?
As soon as you hire someone, fill in the I-9 form on which you determine the worker's eligibility to work in the USA.
Then, if you and the worker both agree that you will voluntarily withhold income taxes, you will also need to get a completed W-4 form.
Right from the start, each time you pay your worker, make all of the required tax deductions and give the worker a check for the net pay, along with a pay stub explaining the deductions.
At this point, we recommend that you hold off on registering for federal and state IDs until you are sure that you will exceed the thresholds.
If it should happen that the employer/employee relationship ends before you have reached the thresholds that make you subject to the nanny tax, then you can simply refund the worker's deductions to them, and no harm done.
Once you know you will exceed the thresholds, then go right ahead and complete the federal and state registrations.
Then be sure you file returns and pay taxes according to your state's requirements; usually that will be within 30 days after the close of each quarter.
Because the feds combine your nanny tax reporting with your own income tax return at the end of the year, you may also need to increase your own withholding at your job, or pay additional federal quarterly estimated income taxes in order to cover the federal liability for nanny taxes.
The easy way: For those of you who are clients of HET Online, enter the record for the worker in your online account and our program automatically will prepare the I-9, W-4, and all of the required registrations for you.
Each time you pay your worker, go online to calculate the paycheck and print the pay stub, and we will prepare and remind you of all required forms and payments.
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I've been paying my caregiver (........nanny, housekeeper, home health aide........) in cash and not paying taxes. What should I do now?
The resources on this website can help you get registered and calculate and file all the required taxes, forms, and returns for this year.
Because the federal "nanny taxes" are filed and paid together with your 1040 income tax return at the end of the year, you will be OK for federal if you increase your own personal income tax withholding at your job sufficiently to cover the added liability before the end of the year.
Unlike the feds, the states do not combine their nanny tax reporting with your own individual income tax return. Many states require quarterly filings, and in some circumstances also quarterly or more frequent payments of the payroll taxes.
You may or may not be faced with some penalties for late filing and paying from your state.
However, in terms of liability, you will be far better off if you voluntarily start reporting and paying now, than if you get caught and are subjected to audits and levies for penalties and interest for several years back.
If you do have a history of illegal payments that goes back to before the beginning of this year, you should seek the advice of your attorney or CPA regarding the advisability of voluntarily opening up back years.
Let your attorney or CPA know that starting this year you will be filing and paying the "nanny tax" as required by law, and seek their advice about what, if anything, to do about prior years.
The easy way: For those of you who are clients of HET Online, you will find the facility for recording this year prior paychecks by going from the Main Menu to Prior Quarters.
You enter the gross pay, and the program calculates the net pay and prepares your delinquent quarterly returns and calculates your required payments if any.
File your delinquent reports and payments, and the state will notify you of any penalties or interest they choose to levy.
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How much will the penalties and interest be?
The good news is that you are not required to file for the federal taxes, which are by far the largest, until the end of the year. So there will be no federal late filing penalty if you catch up before the end of the year.
In addition, if you increase your withholding at your own job by enough to cover the added tax liability, the feds will count those payments as if they had been made throughout the year, so no interest or penalties will apply .
There is an additional cost issue regarding federal unemployment tax (FUTA.) This tax is reduced by certain unemployment amounts the employer pays to the states, but only if the payments to the state are made timely. So you may lose this deduction if you fail to pay your state unemployment tax timely.
For the states, there will be interest and penalties levied if you are delinquent in required payments.
Late filing penalties may be levied for the quarterly reports, regardless of whether you are delinquent in payments. If you enclose an explanation outlining any extenuating circumstances which caused your late filing, the state has the option to abate the penalties.
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OK, I'm going to follow the instructions for registering and filing and paying for this year, but what do I do about the taxes I did not deduct from the worker's pay earlier this year?
The short answer is that you can either pay them yourself (Case 1), or collect them from the worker (Case 2.) The methods below explain how to calculate and report in either case if you choose to do-it-yourself.
Remember that currently household employers are NOT required to deduct income taxes, so whether or not to pick-up and pay-in retroactive income tax deductions is optional to be agreed upon by you and your worker.
Even if you do not withhold income taxes, the worker is responsible for filing and paying his/her own income tax returns. The household employer will report the worker's earnings to the government on a W-2 form at the end of the year.
The required taxes are social security, medicare, unemployment, and other such "employment taxes" levied by your state.
The largest of these taxes are the combined social security/medicare taxes, sometimes called FICA. That tax is 7.65% for the worker and an additional 7.65% for the employer, thus 15.3% in all .
For these you have a choice to make. The employer is allowed to pay those two taxes (none others) for the worker, without deducting them.
An example will make this clearer.
Let's use an easy number for illustation purposes. If you have paid your worker $1000 each quarter in cash so far this year, there are different possibilities for handling the situation.
Case 1. You as the employer may decide that you will pay the FICA for your worker, and let them keep the $1000 as their net pay.
In that case, you will calculate the FICA owed as 15.3% of $1000, or $153. You will eventually pay-in the entire $153 and let your employee keep the $1000 as their net pay.
Depending on your state you may or may not have additional amounts that you must collect from the employee, but these are usually minor amounts.
In California, for instance, you would have to collect SDI at .9%, so the worker must give back to you $9.00 for what should have been deducted for SDI, and you in turn eventually pay-in that $9.00 to the state.
Your state may be different than California, but generally the amounts are none or minor compared to the FICA taxes.
When you report the wages for income tax purposes on the W-2, you will be reporting $1000 as employment taxable wages, but $1076.50 as income taxable wages.
The worker will report $1076.50 as taxable wages on their own 1040 income tax return.
You as the employer must also pay the much smaller federal unemployment tax and any employment taxes levied by your state.
Case 2. Alternatively, you may decide to collect retroactively the taxes that should have been deducted from the worker's wages.
In that case, the worker must return to you his/her share of the FICA, or $76.50, leaving them $923.50 in net pay.
(They would also have to give back whatever state employment taxes should have been deducted, as in the $9.00 of SDI in the California example above.)
You will eventually pay-in the FICA of $153, plus federal unemployment and any state employment taxes owed.
In this case, the W-2 at the end of the year will reflect $1000 as employment taxable wages, and $1000 as income taxable wages.
The worker will report $1000 as taxable wages on their own 1040 income tax return.
Case 3. There is a third possible way to handle this situation. It's referred to as "grossing-up."
We will deal with "employment tax gross-up" in combination with the issue of "income tax gross-up" in the next question in this FAQ.
The easy way: For those of you who are clients of HET Online, the program will automatically calculate checks and prepare your tax returns according to Case 1. (pay the taxes yourself) if you make the following choices in your online account:
1. Choose 'YES' for the "special election" on FICA taxes when adding the worker to your account.
2. Choose 'NO' to deducting income taxes.
3. Enter the worker's gross pay as $1076.50.
The program will automatically calculate checks and prepare your tax returns according to Case 2. (collect the taxes from the worker) if you make the following choices in your online account:
1. Choose 'NO' for the "special election" on FICA taxes when adding the worker to your account.
2. Choose 'NO' to deducting income taxes.
3. Enter the worker's gross pay as $1000.
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What do you mean by "gross-up?"
Gross-up is a term used to refer to the calculation of the gross amount of wages which would result in a stated amount of net pay.
For instance, if you want to pay your worker enough pay so that they take home $1000 each month after deductions, the gross-up calculation has to take into account the tax rates for whatever taxes are being grossed-up for.
The gross-up amount for $1000 net, taking into account only the FICA taxes is $1082.84. If you deduct 7.65% FICA from $1082.84, your net will be $1000. If you include other state taxes in the gross-up, the gross-up amount will be different.
On this website, if you go to Calculate, then click on the **?** symbol next to the word "gross" you will find our gross-up calculator.
Our gross-up calculator applies to what we call "employment taxes" but NOT to income tax withholding. That means we include social security, medicare and any similar taxes imposed by state or local governments at specified percentage rates, but not income tax withholding.
The easy way: Use an annual wage when using our gross-up calculator, and it will automatically take into account the employment tax thresholds.
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Why does your calculator do "employment tax gross-up" but not "income tax gross-up?"
There are some payroll programs which will calculate gross-up on income taxes based upon the withholding tables. However, at HET Online we do not include income taxes in the gross-up calculation because each and every employee will have a different set of circumstances leading to a different overall income tax rate.
Though it is possible to calculate by formula the gross-up for income taxes based upon the payroll withholding tables, the results of such a gross-up are fallacious and misleading.
The income taxes paid by any individual depend upon all of the items which are included on a tax return. Think about your own return, and you will realize that simply using the withholding tables to gross-up is meaningless.
A worker who has become used to being paid cash "under-the-table" may ask you to make their check come out to a particular net pay.
Explain to them that their income tax liability at the end of the year depends upon many factors which are specific to their own particular circumstances, and that you cannot reasonably pay them a wage which is dependent upon how many dependents they have, how much tax-deductible interest and other expenses they pay, what their filing status is, how much they earn from other sources, or any of the other myriad conditions that go into determining their eventual income tax liability at the end of the year.
You can certainly use the gross-to-net calculator on this website to calculate what the worker's net check will be, so that you will both know exactly how much they will be receiving each pay period or per hour given a particular gross pay amount per period or per hour.
Remember also that as a household employer you are NOT required to deduct income taxes. However, the worker is still liable for any income taxes owed.
The IRS does publish a set of "gross-up" formulas. Those formulas, however, are designed for use with certain incremental payments. They use the MTR (marginal tax rate) to calculate certain allowable employer reimbursements such as moving expenses, and are not correctly applicable to the issue of grossing-up a regular paycheck.
The easy (and correct) way: Base your gross wages upon market conditions and the work involved, rather than upon a particular worker's income tax circumstances. If you insist upon trying to gross-up for income taxes, use annual numbers for the closest fit to reality.
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Should the employer withhold income taxes from the household worker's wages?
For household employers, deduction of income taxes is not required, but is permitted if both the employer and worker agree to deduct.
If it is not likely that your worker will end up owing income tax at year-end, we recommend that you elect not to deduct income taxes.
If your worker is likely to end up owing income tax at year-end, you may want to deduct as a courtesy to your worker.
If you do not, then the worker is responsible for making any required quarterly estimated income tax payments, and for any underpayment penalties.
To do the deductions, you will need the income tax withholding tables for federal and for state and local. See the summaries on our home page for links to those tables.
The easy way: For clients of HET Online, when you first enter the worker, one time only, mark the income tax checkbox according to whether you will be withholding or not.
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Do I report taxes for our au pair?
If your au pair is part of the cultural exchange program, in the United States on a J-1 Exchange Visitor Visa, s/he
is not considered an employee, and there are no taxes or tax reports required.
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Can I deduct employer taxes on my income tax return?
Taxes included in your itemized deductions on your tax return are limited to three kinds: state and local income taxes, real estate taxes, and personal property taxes. They do not include employer taxes for household employers.
However, there may be some tax advantages available to you either from the Child and Dependent Care Tax Credit, or from an employer-sponsored tax-exempt benefit under a cafeteria plan.
Check with your income tax preparer or your employer regarding these possible tax benefits.
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Do I really need the Form I-9, employment eligibility verification?
YES. You are required to fill out and sign the Immigration and Naturalization Service (INS) Form I-9 for every employee you hire.
It does not matter whether they are from Brooklyn or Bangladesh.
According to the INS Handbook for Employers, those employers who fail to comply with the verification requirements can be fined $100 to $1,000 for each person for whom proper verification was not required.
In addition, those employers who knowingly hire unauthorized workers can be fined according to this schedule: First offense: $250 to $2000 for each worker, Second offense: $2000 to $5000 for each worker, More than 2 offenses: $3000 to $10000 for each worker, Pattern or practice of violations: $3000 criminal penalties and up to 6 months in jail.
At present, household employers are generally not being pursued for such violations, but they are not legally exempt from the rules.
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