When hiring a companion or home health aide (HHA) to care for an older adult at home, there are two main options: you can work with a home care company or you can hire an independent caregiver.
Hiring caregivers through a licensed home care company means that seniors and their families don’t have to concern themselves with things like tax considerations, payroll issues, bonding and workers’ compensation insurance. Home care companies handle the employer’s side of these things for their professional caregivers and their clients. This includes determining if an individual is legally able to work in the United States, withholding employment tax, record keeping, and making tax payments.
Hiring an independent in-home caregiver who is not affiliated with a company can have a significant impact on your tax bill. In these situations, the caregiver is considered a “household employee,” you are considered their “household employer,” and therefore you are responsible for paying their unemployment, Social Security and Medicare taxes.
If you prefer to go this route instead of hiring a home health aide through a home care company, it is crucial to understand the tax implications of this decision.
IRS Rules for Caregivers and Household Employers
Defining Household Employers and Household Employees
For tax purposes, someone is considered your household employee if you dictate what work they perform in and around your home and how it is done. An independent home health aide is your household employee if they receive instructions on how to care for your loved one from you or another member of the family and you supply the equipment they need.
Unlike household employees, self-employed individuals (including independent contractors) determine how they do their work and furnish their own equipment and supplies. Most independent caregivers are not independent contractors.
Independent caregivers (also referred to as private caregivers) fall into the household employee category unless they are your parent, your spouse, your child (under 21 years old), or an employee under the age of 18.
Employment Eligibility Verification for Independent Caregivers
Once you’ve determined that your independent caregiver will be functioning as a household employee, the first thing to do is ensure that he or she can legally work in the United States. Prior to the new home health aide starting their work, the two of you must fill out Form I-9 (Employment Eligibility Verification), which requires your employee to produce documentation proving their eligibility to work in the U.S. All acceptable forms of documentation for establishing their identity and employment authorization are listed on the third page of this form. The completed form doesn’t have to be formally filed with any government agency, but you, as their employer, must keep it for your records. The government can ask you to present this document at any time.
You’ll also need to apply for an Employer Identification Number (EIN) and keep a record of your household employee’s Social Security number on file.
Tax Obligations of a Household Employer
The tax amount that you must contribute for an independent caregiver who is a household employee will vary, depending on which state you live in and how much you pay for their services.
It’s vital that you maintain detailed accounts of all paperwork related to their 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 tax return or the date when the taxes were actually paid.
Each time you pay the caregiver, be sure to note the date of the transaction and itemize the following:
- Employee’s wages, both cash (e.g., cash, check, money order) and noncash (e.g., food, clothing, lodging);
- Federal income tax withheld;
- State employment tax withheld;
- Social Security tax withheld or paid for your employee; and
- Medicare tax withheld or paid for your employee.
How Employment Taxes Are Paid
Withholding Federal Income Tax
Household employers are not required to withhold federal income tax for household employees, but they can if the employee requests it. If your independent in-home caregiver wishes you to withhold their income tax amount from their paycheck, simply have them fill out a Form W-4 (Employee’s Withholding Certificate) for your records. 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.
Household Employer/Employee Tax Rates
If wages for a household employee amount to less than $2,300 in 2021, neither you nor the employee are responsible for paying Medicare and Social Security taxes on those wages. If you paid the caregiver $2,300 or more, then you are responsible for withholding and paying the Medicare and Social Security taxes for their employment, which is 15.3 percent of their total cash wages. 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 tax and 1.45 percent for Medicare tax) out of their own pocket and withholding the remaining 7.65 percent from their employee’s wages.
Calculating Medicare TaxOnce the $2,300 threshold is met, all wages are considered when calculating the dollar amount of an employee’s Medicare tax. The Medicare tax amount will be whatever the caregiver’s total wage amount was for the year multiplied by .0145.
Calculating Social Security TaxWhen it comes to calculating Social Security tax for a household employee, only wages up to $142,800 are taxed. The Social Security tax amount will be all wages up to $142,800 multiplied by .062.
Calculating Federal Unemployment TaxIf you pay all your household employees a total of $1,000 or more during any calendar 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. The FUTA tax must be paid from your own funds.
Special Rules for State Employment Taxes
Certain states also require household employers to pay a state unemployment tax. Information on state unemployment taxes can be found by contacting your state’s unemployment agency. You can find a list of contacts for state unemployment insurance (UI) tax information and assistance on the United States Department of Labor’s Employment & Training Administration website.
You should also confirm whether you must pay or collect other state employment taxes or carry workers’ compensation insurance.
Tax Deadlines 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 and pay the tax amount due by April 15, 2022.
The following timetable will help you keep track of the important tax deadlines for submitting forms for the 2021 tax year.
January 31, 2022, Deadline
- Obtain an employer identification number (EIN).
- Submit to your employee Copies B, C and 2 of Form W-2 (Wage and Tax Statement).
- Send Copy A of Form W-2 with form W-3 to the Social Security Administration (SSA). Don’t send Form W-2 to the SSA if you didn’t withhold federal income tax and the Social Security and Medicare wages were below $2,300 for 2021.
April 15, 2022, Deadline
- File Schedule H (Form 1040 or 1040-SR) Household Employment Taxes.
- File your own personal income tax return (Form 1040, 1040-SR, 1040NR, 1040-SS or 1041), if necessary, or file Schedule H by itself.
IRS Publication 926 (Household Employer’s Tax Guide 2021) 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.
An Easier Way to Hire In-Home Care
If managing and paying taxes as a household employer is not something you feel you are up for, consider hiring a caregiver through a licensed home care company. The company will take care of all tax obligations, workers’ compensation insurance and payroll issues, leaving you with a simple hourly rate for home care services.