When hiring an outside professional 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 older adults and their families don't have to concern themselves with tax considerations. Home care companies handle the employer's side of the tax obligations for their professional caregivers. This includes determining if an individual is legally able to work in the United States, handling tax withholding and record keeping, and making tax payments.
Hiring an in-home caregiver who is not affiliated with a company can have a significant impact on your tax bill. In these situations you are typically regarded as the caregiver’s "household employer" and are responsible for paying the new employee's unemployment, Social Security and Medicare taxes.
If you choose to go this route instead of hiring through a home care company, it is crucial to understand the tax implications of this decision.
Defining a "Household Employer"
For tax purposes, the primary factor that determines whether a professional caregiver is considered your household employee is whether you dictate how he or she performs their work. A home health aide who is your household employee will receive instructions on how to care for the older adult from you or another member of the family.
Independent caregivers tend to fall into the household employee category, unless they are your spouse, your child (under 21 years old), or any employee under the age of 18. 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 are classified as independent contractors, rather than household employees, and must pay their own employment taxes.
Employment Eligibility Verification
Once you've determined that your new 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 aide starting their work, the two of you must fill out Form I-9 (Employment Eligibility Verification), which requires the aide to produce documentation that proves their eligibility to work in the U.S. All acceptable forms of documentation are listed on the third page of the form. The completed form doesn't have to be formally filed with any government agency, but you, as the hiring party, must keep it for your records. The government can ask you to present the document 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 a hired caregiver 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 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 return or the date when the taxes were actually paid.
Each time you pay the caregiver, 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 tax withheld and
- Medicare tax withheld
Understanding Employment Taxes
Household employers are not required to withhold federal income tax for an employee, but they can if the employee requests it. If the caregiver 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 wages for a household employee amount to less than $2,000 in 2017, neither you nor the employee are responsible for paying Medicare or Social Security tax on those wages. If you paid the caregiver $2,000 or more in wages, then you are responsible for withholding and paying the 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 $2,000 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 caregiver’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 $127,200 are taxed. The Social Security tax amount will be all wages up to $127,200, multiplied by .062.
- Calculating Federal Unemployment Tax
If you pay your household employees 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.
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 and pay the tax amount due by April 17, 2018.
The following timetable will help you keep track of the important tax dates for submitting forms for the 2017 tax year.
January 31, 2018
- 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)
April 17, 2018
- File Schedule H (Form 1040) Household Employment Taxes
- File your own personal income tax return (Form 1040, 1040NR, 1040-SS or 1041), if necessary, or file Schedule H by itself
IRS Publication 926 (Household Employer's Tax Guide 2017) 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 Alternative
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 issues, leaving you with a simple hourly rate for services.