Financial Facts About Caregivers Who Work in Your Home
- You and another parent hire a caregiver to take care of your two infants in one or both of your homes...
- A college student picks up your first grader after school and watches him until you get home from work...
- You take classes and have an in-home caregiver watch your two children every Tuesday and Thursday evening...
Did you realize that in the eyes of the government, you are probably an employer with reporting responsibilities?
Can’t My Caregiver Be an Independent Contractor?
The IRS is very strict about who is or is not an independent contractor (self-employed). A gardener who takes care of a number of yards, brings his own tools and makes his own schedule is not the employee of any of the families who use his services. But an in-home caregiver who is over 18 years old, whom you hire and can fire, who follows your specific directions and uses your supplies in caring for your child is an employee, which means you’re an employer and have to pay taxes. The only exception is when you use a caregiver supplied by an agency and you pay the agency, not the worker. In that case, the agency is the employer.
What Are My Federal Responsibilities?
Social Security & Medicare: You are responsible for paying both your and your employee's share of Social Security and Medicare taxes if you paid the same child care provider $1,500 or more in 2007. The rates are 6.2% for Social Security and 1.45% for Medicare for the employer’s share. The same percentages need to be withheld from the employee’s wages, for a total of 15.3%. So, if you pay a caregiver $10,000 this year, you’ll owe $1,530 in federal employment taxes. Many caregivers prefer not to have Social Security taken out of their wages, but it protects them in the future. Since you as the employer could be backbilled for both your and the employee’s share of these taxes, it is advisable to pay them currently. Also, you can only take a child care tax credit on your federal income taxes if you pay Social Security.
Here’s how to pay the tax: Use a Form SS-4 to obtain an Employer Identification Number (EIN) from the IRS. The forms are available from your local IRS office, www.irs.gov or 800-TAX-FORM (800-829-3676). Form SS-4 has information on how to apply for an EIN by mail or phone. Report and pay the Social Security and Medicare taxes by filing Schedule H with your annual federal income tax return (Form 1040). A penalty can apply if you don’t withhold enough federal income tax to cover both your personal taxes and the federal unemployment taxes you owe on your in-home caregiver. You may want to increase your federal withholding or pay estimated tax payments in advance to avoid a penalty. Call 800-TAX-FORM to request Form 1040-ES Estimated Tax for Individuals or download the form from www.irs.gov.
You should also obtain the useful IRS Publication 926, Household Employer’s Tax Guide for detailed information on your responsibilities.
Federal Income Tax Withholding, Earned Income Credit & W-2 Requirements: Caregivers who work in your home are household employees and exempt from mandatory federal withholding of income taxes, but you can choose to withhold these taxes if the employee asks you to. The employee must fill out a W-4 form and you report and pay any federal income taxes you withhold with your annual Form 1040. An employee who is eligible for the Earned Income Tax Credit may elect to receive advance payments during the year with his/her pay. The employee must give you a completed, signed W-5 to request the advance payments. For more information, see IRS Publication 15, Circular E, Employer’s Tax Guide. As an employer, you also must issue your employee a W-2 form by Jan. 31 and file a copy with the Social Security Administration by February 28.
Federal Unemployment Insurance: If you paid your employee $1,000 or more in one calendar quarter in 2007, you must pay a Federal Unemployment Tax (FUTA) on these wages with your annual Schedule H of your 1040 Form. The 2007 rate is 6.2% of the first $7,000 in wages. You can take a 5.4% credit against this tax if you paid your full State Unemployment Insurance (SUI) payments before the filing due date for the 1040 Form.
Exceptions: Wages paid to employees who are under 18 years old and who are not full-time household employees (such as a student) are exempt from Social Security and Medicare taxes. There are also some complicated exceptions to the rules if the in-home caregiver is a relative (spouse, child or grandparent). For more information about relative caregivers, Social Security, Medicare or FUTA, contact the IRS, 800-829-1040, www.irs.gov or the local IRS office: 1301 Clay Street, Suite 160, Oakland, CA 94612, 510-637-2487 (electronic assistance only.)
Federal Immigration Status: You are required to complete an Employee Eligibility Verification Form (I-9) to keep on file for the federal government. This form establishes that the employee is eligible to work in the United States. To receive this form, contact U.S. Citizenship and Immigration Services at www.uscis.gov.
Reprinted with the permission of BANANAS, Inc. © 2007 BANANAS
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