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Domestic Employees: Should You Pay Under The Table?

Domestic Employees: Should You Pay Under The Table?

It is a common complaint this time of year: taxes are complicated and expensive. Between your mortgage, your earnings, your itemized deductions and your domestic employees, filing taxes can be a long and arduous process.

Wait, what do domestic employees have to do with taxes?

According to the Internal Revenue Service (IRS) Publication 926, you should withhold taxes from pay made to domestic employees. How do you know who to pay and how much?

What Are Domestic Employees?

The IRS says that if you pay someone to do work around your home, and you control not only what they do but also how they do it, that is considered a domestic employee. These include:

  • Nannies
  • Cleaning People
  • Caregivers
  • Drivers
  • Yard workers
  • Maids

Other types of employees may qualify as domestic employees. Check with the IRS to determine if a worker in your home is a domestic employee.

Service providers who control their own tools, hours and services may or may not be considered domestic employees. These include plumbers and lawn services, or any other service that hires and pays their own employees.

Some service providers could be considered employees for tax and workers compensation purposes. To find out how to determine who is or is not an employee, click here.

What Should Be Withheld?

For tax year 2017, any domestic employee paid more than $2,000 in the tax year must have Social Security and Medicare deductions withheld. In addition, their employer must also pay Social Security and Medicare on their behalf.

Federal taxes do not need to be withheld unless the employer and employee agree to this in advance. The IRS goes into great detail on the amount of Social Security and Medicare taxes to be withheld, as well as the amount required to be paid by the employer, the forms that need to be filed, and when this should be done.

State taxes may also need to be withheld for domestic employees. Contact your state tax office or a local accounting firm for more information on registering as a household employer and paying these taxes.

Should You Pay Under the Table?

The intricacies of dealing with taxes for domestic employees may not seem to be worth the trouble. Often these workers are undocumented and may prefer to be paid in cash to avoid tax complications.

The IRS advises that failure to withhold and pay taxes to domestic employees will result in the employer being required to pay not only the taxes that should have been paid by the employer, but also those taxes that should have been withheld from the employee. Interest and penalties may also be charged on previously owed taxes. Chronic and willful failure to pay taxes may even result in jail time.

There are payroll services and accountants available who can help cut through the red tape of domestic employee payroll and tax withholding. For a small fee these services will handle the matter for you.

As a reminder, domestic employees will also need workers compensation insurance. This may be included with some payrolls services, but if it isn’t, contact your Hayes Broker to find out how to make workers compensation for your household employees a part of your insurance portfolio.


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