If you hire a caregiver to care for someone in your home, you may have payroll tax responsibilities. If you hire a caregiver through an agency, the agency will probably take care of the payroll tax reporting and payment. But if you hire a caregiver on your own, you would be responsible for the payroll tax withholding, reporting and payment.
The IRS points out that you would not have to withhold social security and Medicare taxes if the caregiver is your spouse, parent, a child under age 21, or an employee under age 18. But there is an exception if the caregiver is your parent. You would be responsible for payroll taxes if the parent cares for your child who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in any calendar quarter, and you are divorced and not remarried, or a widow or widower, or you are living with a spouse whose physical or mental condition prevents him or her from caring for your child.
According to the IRS, you would be responsible for withholding social security and Medicare taxes if you pay the caregiver wages of over $1,800 for the year. This is the amount that applies for 2013 and is subject to change from year to year.
Social security tax has to be withheld from the caregiver’s wages at a rate of 6.2% up to the social security wage base limit of $113,700 of total wages for the year (in effect for 2013). Medicare tax is withheld at a rate of 1.45% with no wage limit. As the employer, you would be responsible for paying the matching employer’s share of the social security and Medicare taxes.
If you pay a caregiver more than $200,000 in a year, you would have to withhold a 0.9% Additional Medicare Tax on the excess. There is no matching employer share for this additional tax.
You could also agree to pay these taxes from your own funds instead of deducting them from the caregiver’s wages. In this case you would be responsible for paying both the employee and employer portion of the social security and Medicare taxes. The taxes you pay to cover the caregiver’s share are included in the caregiver’s wages for income tax purposes, but are not counted as social security and Medicare wages, or as federal unemployment wages.
According to the IRS, you are not obligated to withhold federal income tax from the caregiver’s wages. But if the caregiver asks you to withhold, you can. If the caregiver asks you to withhold federal income taxes, he or she should provide you with a Form W-4, Employee’s Withholding Allowance Certificate. To determine the amount to withhold based on the information on Form W-4 you can use the tables in IRS Publication 15 (Circular E), Employer’s Tax Guide.
If you pay the caregiver over $1,000 in wages for the year, you would have to pay federal unemployment taxes. You may also be responsible for paying state unemployment taxes for the caregiver. To see whether your state requires you to pay this unemployment tax you should contact your state unemployment tax agency. You can find information on Contacts for State UI Tax Information and Assistance on the U.S. Department of Labor website. The federal unemployment tax rate is 6% on wages up to $7,000 per year. But you can claim a credit of 5.4% for unemployment contributions to the state, resulting in a net federal unemployment tax rate of 0.6%.
You would have to issue a Form W-2 to the caregiver after the end of the year, reporting the total wages paid and the taxes withheld for the year. A copy of Form W-2 must also be sent to the IRS, with the transmittal Form W-3. These forms require you to have an employer identification number. You can apply for this number online on the IRS website. Form W-2 must be given to the caregiver by January 31 of the following year and sent to the IRS by February 28.
You report the payroll taxes for your caregiver on Schedule H, Household Employment Taxes when you file your annual personal federal income tax return. If you do not have to file a personal income tax return, you would file Schedule H by itself in order to pay your payroll tax obligations.
You should take into account the amount of payroll taxes you expect to owe when you file Schedule H along with your own income tax liability. You need to either have enough tax withhold from your own income, or make estimated tax payments during the year to cover your tax liability and to avoid an underpayment penalty when you file your annual return.
Apply for an Employer Identification Number (EIN) Online, IRS
Contacts for State UI Tax Information and Assistance, U.S. Department of Labor
Form W-2, Wage and Tax Statement, IRS
Form W-3, Transmittal of Wage and Tax Statements, IRS
Form W-4, Employee’s Withholding Allowance Certificate, IRS
Publication 926, Household Employer’s Tax Guide, IRS
Schedule H, Household Employment Taxes, IRS
Topic 756 – Employment Taxes for Household Employees, IRS