In today’s world it is common to have domestic help; from gardeners and housekeepers to nannies and home health care assistance. The question is, when does this situation turn into an employer and employee relationship and what are the filing requirements and regulations to follow?
Independent Contractor or Employee?
There is a strong lean towards Employee vs Independent Contractor. For individuals in California, AB 5 is the regulation that applies to determine the classification. Generally speaking, a household worker is considered an employee if you control what work is done and how it is done.
Local Laws
State and Federal Department of Labor and tax agencies have various regulations regarding domestic employees. Some cities have their own regulations as well, so it’s important to research your area. These laws can determine when you need to have a written contract and when you need to issue a W2 for their pay.
Pay & Filing Requirements
According to the IRS, if you pay a domestic worker (an individual – not a corporation or service company) in 2024 over $1,000 in any calendar quarter or $2,700 in the calendar year, you are required to file a Schedule H (2025 limits are increased to $2,800/year). Schedule H will calculate the employment taxes due and include them on your 1040 filing. You will also need to issue a W2 to that employee showing the employment taxes were paid.
The FICA reporting threshold for 2024 is $2,700 ($2,800 for 2025) of cash wages to any individual in a calendar year. Cash wages are all forms of payments including payments made by cash, check, money order, or electronic transfer (i.e. Venmo, Zelle, PayPal, etc.).
The Federal Unemployment Insurance threshold is $1,000 in a calendar quarter to all employees combined in the current or prior year. Once reached, you must pay FUTA (federal unemployment tax) on the first $7,000 of cash wages you pay to each household employee.
Benefits for the Employers (and Employees)
Expanded savings from Dependent Care Tax breaks make claiming a child care worker (nanny) as an employee an advantage for these special credits. If the care is medical in nature (i.e. care for an aging relative) the wages could qualify as a Medical Expense Deduction (IRS Pub 502).
There are benefits to the employee as well. We have seen various stimulus payments in the last few years based on wages, unemployment benefits, social security, and having a paystub can help them qualify for health insurance (required in California) and various personal loans.
The passing of SECURE 2.0 Act also expanded retirement plans for domestic employees (Section 118). Effective for 2023 and beyond, household employers can offer simplified employee pension (SEP) plans to their household employees and treat them as deductible contributions.
Other Issues
Workers Compensation is based on the state requirement. For California, workers compensation is required for household employees, but it can help protect the employer from liabilities.
Additionally, in California, they do not allow household employers to pay household employment taxes on their individual income tax return and instead they must register with the EDD (Employment Development Department) to file and pay their state employment taxes. The California EDD has a Household Employer’s Guide with information on California state laws and managing an employer payroll tax account online.
We highly recommend using a payroll company to process and file your payroll and payroll taxes.
To discuss your nuanced situation or help you get into compliance, please reach out to a member of our team.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.