Academic journal article Journal of Accountancy

The Costs of Household Employees: Complying with Legal Requirements When Employing Domestic Help

Academic journal article Journal of Accountancy

The Costs of Household Employees: Complying with Legal Requirements When Employing Domestic Help

Article excerpt

While most CPAs are aware of the need to file payroll reports for household employees, clients may not fully understand the risks of not reporting wages paid to household workers.

OVERVIEW

Despite the publicity about the "nanny tax" (which includes Social Security, Medicare (collectively, FICA) and federal unemployment tax (FUTA)), many household employers still pay their babysitters and housekeepers in cash, without withholding taxes or filing the correct forms. Often, an employee specifically requests cash and the employer wants to avoid paperwork; sometimes, employers assume a low-income worker is not required to file a return (and, thus, does not need a form W-2) or employers want to save employment taxes by paying compensation "under the table."

A taxpayer who paid a household employee more than $l,400 in cash wages in 2003 most likely owes the nanny tax. Even if annual compensation is expected to be less than the threshold for withholding, tax should be withheld--the employer can later refund the withheld taxes if the worker does not meet the filing threshold.

DILEMMA

Many low-income employees are discovering they can claim the earned income credit (EIC) based on their household wages. Most who learn about it will immediately request a form W-2 from their employers, even if they previously agreed no tax forms would be filed.

The EIC is treated as a tax payment; any excess over the employee's tax liability is refunded. Refundable credits can be significant and provide quite an incentive for an employee to report wages on form 1040.

Employers may face the following additional costs in this situation:

* FICA tax. …

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