How Hiring an In-Home Caregiver Can Affect Taxes
When hiring an outside professional to care for an older adult at home, families have two main options: they can work with a home care agency or they can hire an independent home health aide.
Agencies often handle the employer's side of the tax obligations for their employee's, so hiring an aide through an agency means that older adults and their families don't have to concern themselves with additional tax considerations.
Hiring a home care aide who is not attached to an agency can have a significant impact on the family's tax bill. In these situations, the older adult and/or their family is typically regarded as the "household employer" of the independent aide. That means that the family is responsible for paying the employer's portion of their new employee's unemployment, Social Security and Medicare taxes.
Am I a "household employer?"
For tax purposes, the primary factor that determines whether a home health aide is considered your household employee or a self-employed, independent contractor (and thus is responsible for their own employment taxes), is whether you dictate how he or she performs their work. A home health aide who is your household employee will receive their instructions on how to care for the older adult from you or another member of the family.
Home health aides who aren't affiliated with an agency tend to fall into the household employee category, unless they are your spouse or child (under 21 years old); these individuals are never considered employees, even if they receive compensation for providing care.
On the other hand, an individual who is self-employed typically determines how they do their work and provides the necessary equipment to do so. Self-employed individuals such as plumbers and repairmen are typically classified as independent contractors, rather than household employees.
Can they legally work?
Once you've determined that the home health aide is categorized as a household employee, the first thing to do is ensure that he or she can legally work in the United States. Asking to see a prospective employee's Social Security card is the easiest way to determine their working status.
Prior to the new aide starting their work, the two of you must fill out a Form I-9: Employment Eligibility Verification, which requires the aide to produce documentation that proves their eligibility to work in the U.S. The form doesn't have to be formally filed with any government agency, but you, as the hiring party, should keep it for your records, since the government can ask you to present the document as proof, at any time.
You'll also need to apply for an Employer Identification Number (EIN) and keep a record of your employee's Social Security number on file.
Tax obligations of a household employer
The tax amount that you must contribute for an aide who is a household employee will vary, depending on which state you live in and how much you're paying them for their services.
It's vital that you maintain detailed accounts of all materials related to a home health aide's wages and taxes. You must keep a given year's employment tax records for at least four years after whichever is later: the due date of the return, or the date when the taxes were actually paid.
Each time you pay the aide, be sure to write down the date of the transaction, as well as the following:
- Employee's wages, both cash (e.g. cash, check, money order, etc.) and noncash (e.g. food, clothing, lodging, etc.)
- Federal income tax withheld
- State employment tax withheld
- Social security and Medicare tax withheld
Ins and outs of employment taxes
Here are a few key components of the household employment tax process to keep in mind:
- Withholding: Household employers are not required to withhold federal income tax for an employee, but they can if the employee requests it. If an aide wishes you to withhold their income tax amount from their paycheck, simply have them fill out a Form W-4: Employee's Withholding Allowance Certificate, which you will then file with the IRS on their behalf. Just remember, if you withhold their federal income tax, you are responsible for paying the full amount on Tax Day. You must also inform the aide about the Earned Income Tax Credit (EITC), which can reduce the amount that a low-income earner owes in taxes.
- Employer/employee tax obligations: If you pay an aide more than $1,900 in cash wages during the tax year, then the IRS will consider you on the hook for the entire Medicare and Social Security tax amount for their employment, which is 15.3 percent of what you paid them. In a typical employment situation, the two parties split this cost down the middle, with the employer paying 7.65 percent (6.2 percent for Social Security and 1.45 for Medicare) out of their own pocket and withholding the remaining 7.65 percent from their employee's wages.
- Calculating Medicare tax: Once the $1,900 threshold is met, all additional wages are considered when calculating the dollar amount of an employee's Medicare taxes. The Medicare tax amount will be whatever the aide's total wage amount was for the year, multiplied by .0145.
- Calculating social security tax: When it comes to calculating Social Security taxes for a household employee, only wages up to $117,000 are taxed. The Social Security tax amount will be all wages up to $117,000, multiplied by .062.
- Calculating unemployment tax: In addition, if you pay an aide more than $1,000 during any quarter of the tax year, then you must also cover the six percent federal unemployment tax amount (FUTA), which helps compensate workers who lose their jobs. Once the $1,000 in a single quarter qualification is met, a six percent FUTA tax is applied to wages up to $7,000.
- Special rules for state taxes: Certain states also require household employers to pay a state unemployment tax as well. Information on state unemployment taxes can be found by contacting your state's unemployment agency, using this list: Contacts for State UI Tax Information and Assistance.
Important dates for household employers
Paying taxes as a household employer requires you to fill out and file Schedule H along with your federal income tax return (Form 1040, 1040NR, 1040-SS or 1041), and pay the tax amount due by April 15, 2015.
The following timetable will help you keep track of the important tax dates for submitting forms for the 2014 tax year:
February 2, 2015
- Obtain an employer identification number (EIN)
- Submit to your employee Copies B, C and 2 of Form W-2: Wage and Tax Statement
March 2, 2015
- Send Copy A of Form W-2 to the Social Security Administration (SSA)
April 15, 2015
IRS Publication 926: Household Employer's Tax Guide offers more in-depth information about filing taxes as a household employer, and contains a tax withholding table to help you calculate how much you and your employee will owe in taxes.