The 12-Step Program To Paying Your Household Employee
It's an arduous, dare we say "taxing", journey to pay a household employee correctly. Clearly the IRS thinks we have Finance and HR departments in our house, just like a big corporation. You'll see why we created Nest Payroll, but in the meantime, here's the lowdown (and these are just the basics).
The very first question to ask yourself is "Am I going to pay someone who helps me with household work (like a nanny, caregiver, housekeeper, personal assistant or gardener) $2,100/year or more?" If so, these are the basic steps for how the payroll process works. And most household workers are employees. You can check on your situation by downloading a copy of the IRS Publication 926 on household employment. Happy reading!
LEGAL TO WORK Make sure your employees are legal to work. Ask them to fill out an I-9, and then file it in a safe place if you ever get audited. Get the I-9 form here.
TAX WITHHOLDINGS You also need your employees to fill out a W-4. Here's an area where it differs from non-household employees. You are not required to withhold income tax, but this means your employees will owe at the end of the year, which could be quite a burden for them. We recommend you play it safe from the beginning (and Nest Payroll makes it easy!). Keep the W4 in a safe place with the I-9 forms.
FEDERAL EIN Get your EIN - an Employer Identification Number, from the federal government. This is something the IRS has done well - It's super easy and fast online. Make sure you select "household employer" for type of employer as you go through the steps. If you already have an EIN, but it's for an LLC or incorporated business, you will need a second EIN just for household. You need to keep the EINs completely separate. If your existing EIN is for a sole proprietor business, then you can use it.
STATE REGISTRATION Register as an employer, and you'll need your Federal EIN to register in your state. Every state is different. With California, elect the household employer status, and make sure you also file a new hire report with any new employee. You'll also need to pay an additional employer tax for disability (SDI) and training (ETT). For California households, here's a guide to getting it all setup.
WORKERS' COMPENSATION This is insurance to protect you and your employee, not a tax, and it's mandatory in many states even if you have just one part-time employee (and worth the peace of mind for the protection it provides your family). Check your homeowners' or renters' insurance to see if you already have some coverage. For example, you might be covered if your nanny works less than 20 hours/week. Or you might need to supplement with an "endorsement" for a household employee who works more than 20 hours/week. A typical cost for an endorsement is about $600/year. Every insurance company is different so you need to check. For California, you can read more here and Nolo also has a good summary.
OVERTIME Have your employees use a timesheet that tracks hours/day so you can compute overtime. Every state is different. In California, over 8 hours in one day, as well as over 40 hours in one week, is calculated at 1.5x the hourly rate (you can easily enter regular and overtime hours into the Nest Payroll app). 12 or more hours in one day is calculated at 2x the hourly rate.
PAY STUB With each paycheck, you need to provide a paystub that shows the breakdown including taxes and withholdings (Nest Payroll does this for you).
You need to withhold and pay Social Security and Medicare taxes. The employee pays half (7.65%) and the employer pays the other half (7.65%) = 15.3% of cash wages.
You need to pay federal unemployment tax if you pay total cash wages of $1,000 or more in any calendar quarter. This is 6% of the first $7,000 in wages, and wages over $7,000 a year per employee aren't taxed.
Each state handles unemployment differently, so you may owe state unemployment tax. For California, you pay into their unemployment system and then pay the difference to Federal at the end of the year.
EVERY QUARTER- STATE File and pay taxes due to the state each quarter (in California you have to elect to pay once a year, the default is quarterly).
EVERY QUARTER - FEDERAL File and pay your estimated taxes through the Federal Form 1040-ES each quarter (or increase your withholdings through your employer), so you don't owe penalties at the end of the year.
W2 At year-end, provide a W2 to your employees, and prepare and file Copy A of Form W-2 and Form W-3 to the SSA (Social Security Administration).
AT TAX TIME Fill out Schedule H and attach to your personal tax return (Form 1040).
Sign up with Nest Payroll to make these steps a lot more manageable.