Step 4: Determining What Taxes You Must Withhold

Step 4: Determining What Taxes You Must Withhold

If your household employee will earn $1,800 or more per year, you must withhold Medicare and Social Security taxes, commonly referred to as FICA.

If you will pay your household employee $1,800 or more this year in gross wages, you are required by federal law to withhold and pay Social Security and Medicare taxes, which are sometimes collectively referred to as FICA taxes. One half of the total FICA tax you owe the government is withheld from your household employee's wages. NannyPay will automatically calculate the correct amount of FICA withholding. See Setting Up NannyPay. You will pay your half of the tax when you file your federal tax return next year.

The government also offers household employers the option of paying their employee's share of Social Security and Medicare taxes, in addition to their own. If you choose this option, remember that the government considers the Social Security and Medicare taxes you pay on behalf of your employee to be additional income to your employee. Therefore, these taxes must be included in your employee's wages as additional income. (NannyPay also assumes that this amount is income for state income tax purposes as well.) Those amounts do not, however, count as Social Security and Medicare wages (FICA wages) or as federal unemployment tax wages (FUTA wages). Click here for an example.

If the appropriate option is checked, NannyPay will not withhold your household employee's share of FICA, and will "gross up" your household employee's income appropriately. It will also withhold income tax (if that option is enabled) based upon the "grossed up" wages. To learn more about enabling these options, see Setting Up NannyPay.

You are not obligated to withhold federal income tax from your household employee's wages unless you and your household employee both agree to do so.

If both you and your household employee agree, you may also withhold federal income tax from your household employee's wages; otherwise, you have no obligation to withhold federal income tax. You will also learn that most states follow this rule as well. Of course, your household employee will still be responsible for paying federal and any state income taxes on the cash wages he or she receives from you. To help your household employee avoid a hefty tax bill at the end of the year, we recommend that you withhold both federal and state income taxes. NannyPay supports all 50 states.

If you have enabled the appropriate settings, the NannyPay software will automatically calculate the amount of federal and state income taxes you must withhold from your household employee's pay. Some local taxing authorities are supported as well! See Setting Up NannyPay.

If you and your household employee agree to withhold federal income tax, your household employee is required to provide you with a completed federal W-4 form.

Your household employee must complete a Form W-4 to permit you to withhold income tax. NannyPay software will automatically determine the correct amount of withholding based upon the number of exemptions and marital status your household employee claims. You should get the completed Form W-4 from your household employee on or before your household employee's first day of work. The W-4 certificate is in effect until your household employee files a new one. When your household employee gives you a new Form W-4, you must start using it no later than the first payroll period ending on or after 30 days from the date you receive it. Remember, you do not have to withhold federal income tax on your household employee's wages unless you and your household employee agree to do so.

You should determine your state and local withholding obligations.

Following the federal rule, most states do not require you to withhold state income tax from your household employee's wages unless you both agree. Your state may also have unemployment compensation withholding requirements or other employer obligations such as workers' compensation insurance. Similarly, local municipalities may have withholding rules that apply to you. You should verify your own state's rules with your state revenue department, state unemployment compensation board, and other appropriate agencies.

NannyPay software supports income tax withholding for all fifty states and some major cities. NannyPay does not automatically support unemployment compensation withholding for each state. However, if your state requires you to withhold unemployment compensation contributions, you can manually configure NannyPay to withhold the correct amounts. See Setting Up NannyPay

The Federal Insurance Contributions Act (FICA) provides for a federal system of old age, retirement, disability, and health benefits for workers and their families. This system is financed through Social Security and Medicare taxes. You and your household employee pay equal amounts for these taxes.

For Social Security, the tax rate is 6.2% each for you and, for 2012, 4.2% for your household employee on the first $110,100 of wages. For Medicare, the rate is 1.45% each on all wages. If you do not deduct your household employee's share from his or her wages, you must pay the household employee's share of this tax as well as your share (a total of 10.4% for Social Security and 2.9% for Medicare). NannyPay automatically calculates the amount of FICA taxes you must withhold from your household employee's pay.

FICA Wages are all wages subject to either Social Security and/or Medicare taxes. For 2012, Social Security tax is calculated on your employee's first $110,100 in cash wages. Medicare tax is calculated on all wages.

FUTA wages are all wages subject to Federal Unemployment Tax (FUTA). If you pay cash wages to your employee totaling $1,000 or more in any calendar quarter of this year, the first $7,000 of cash wages you pay this year and next year are FUTA wages.

Suppose you hire a household employee and agree to pay him or her cash wages of $100 per week. Because you expect to pay your household employee $1,800 or more for the year, you are required to withhold and pay FICA (Social Security and Medicare taxes) on these wages. You decide to pay your household employee's share of FICA taxes from your own funds, and, accordingly, you do not withhold any Social Security or Medicare taxes. For each wage payment of $100 to your household employee, you will ultimately owe the government $15.30: your household employee's $6.20 Social Security tax plus $1.45 Medicare tax , and your $7.65 share of the same taxes.

For income tax purposes, your household employee's wages each pay day are $107.65 ($100 plus the $7.65 share of Social Security and Medicare taxes you will pay on your household employee's behalf). Federal income withholding tax will be calculated on the basis of $107.65 in cash wages, not $100. NannyPay also assumes that for state income tax purposes, your household employee's income will be $107.65.

Cash wages include wages paid by checks, money orders, etc. Cash wages generally do not include the value of food, lodging, clothing, or other non-cash items you give a household employee. If you are withholding tax for an employee, almost everything you pay or give your employee for work done is income from which tax must be withheld. Enter the total amount withheld in the appropriate box on the employee's Form W-2. Wages generally include: salaries, vacation allowance, bonuses, meals, lodging, clothing, bus and train tokens, and other non-cash items. See IRS Publications 15 and 926 for more details.

The amount of income tax to be withheld from your household employee's pay will depend upon the filing status and exemptions claimed by your household employee on Form W-4. You should get the Form W-4 from your household employee on or before her first day of work. The W-4 certificate is in effect until your household employee files a new one. If your household employee gives you a new Form W-4, you must start using it no later than the first payroll period ending on or after 30 days from the date you receive it. You keep Form W-4 for your records; you do not send it to the IRS. Remember, you do not have to withhold federal income tax on wages paid to a household employee for services performed in or about a private home, unless the employee asks for it and you agree to it.

Form W-4 is also very important for using NannyPay software. You should take the information from your household employee's completed Form W-4 and check off the appropriate boxes in the Federal Withholding Options section of the NannyPay's Set Up window. The NannyPay program will then calculate the appropriate amount of federal withholding.

Any income tax withholding you pay for your household employee without deducting it from his or her wages is additional income subject to income, Social Security, and Medicare taxes. You must include it in boxes 1, 3, and 5 on the household employee's Form W-2. You must also report this income on Schedule H.