Ever use baby sitters? You may have a household employee.
You have a household employee if you hired someone to do household work and that worker is your employee. The worker is generally considered your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. Depending on the circumstances, it may not matter whether you pay the worker on an hourly, daily, weekly basis, or by the job. As is true for companies that hire labor, the deciding factor usually comes down to how much control you have over the means and manner of the baby sitter’s work. The less autonomy the baby sitter has, the greater chance that she is a household employee.
So what if your baby sitter is a household employee?
If you do hire a household employee then you need to establish tax accounts with the state department of revenue and IRS, and also register with the state department of labor to establish yourself as an employer. You must withhold standard payroll taxes from each paycheck you give your employee, which goes toward Social Security, Medicare and federal and state income taxes. (For Social Security and Medicare, the total contribution is 15.3 percent, with the employer and employee each contributing 7.65 percent. Add in a small contribution all employers pay for unemployment taxes and a typical employer’s payroll taxes are approximately 9 percent.)
On a quarterly basis, all employers must remit those withheld taxes to both the state and the IRS. At year-end, you must provide a W-2 to your employee and file IRS form Schedule H with the state and federal government as part of your personal income tax return in April. It is probably worth hiring a payroll company, as the tax withholding and quarterly reporting is difficult to administer on your own.
There are tax breaks available if you pay for childcare!
Many families can reduce their tax liability by $1,200 or more per year by exploring the following:
Pre-tax Flexible Spending Accounts: Check with your employer, some companies offer these accounts (sometimes as part of a “cafeteria plan”), which allow employees to contribute a certain amount of their pre-tax salary to an account to pay for qualifying child care.
The Child and Dependent Care Tax Credit: This credit may provide 20% of your child care costs up to $1,200 in the form of a federal tax credit. To receive this credit, you must not have a non-working spouse, and you must include Form 2441 with your annual federal tax return. This credit is available whether you spend the money on daycare, preschool, or individual baby sitters.