What You Should Know When Employing Household Workers

Title:
What You Should Know When Employing Household Workers
Publication:
The July 2013 Riker Danzig Tax and Trusts & Estates Update
Attorneys:
Practices:

When you have a housekeeper, a gardener or a nanny assisting you within your home, you should be aware that you are considered a "household" or "domestic" employer and have reporting and tax obligations under federal and state law1.

FEDERAL LAW

Work Eligibility: If a household worker is employed on a regular basis (for example, once a week), the Immigration Reform and Control Act of 1986 requires employers to verify and maintain records evidencing the employee’s eligibility to work in the United States. The employee must complete U.S. Citizenship and Immigration Services (USCIS) Form I-9 no later than the first day of work.

Social Security and Medicare: If a domestic employee’s salary is at least $1,800 a year as of 2013, the employer and employee must each contribute 6.2% on up to $113,700 of wages toward Social Security taxes (FICA). The employer and employee must also each contribute 1.45% (with no wage limit) to Medicare, with an additional 0.9% in Medicare tax for wages over $200,000 as of 2013. If an employer chooses to pay an employee’s share of taxes, the employee must report such payments as additional wages on his or her income tax return.

Unemployment Insurance: For each employee paid more than $1,000 per calendar quarter, an employer must pay the Federal Unemployment Tax Act (FUTA) tax at the nominal rate of 6% on up to $7,000 per employee. The effective rate depends on the amount of state credit available (which depends on how much in unemployment funding the state still owes to the federal government). New Jersey and New York employers, for example, paid an effective federal rate of 1.2% in 2012.

Withholding: For mandatory Social Security and Medicare withholding, and for any voluntary income tax withholding, the employer has to complete Forms W-2, W-3, and W-4. The employer must also complete Schedule H on his personal tax return (even if not required to file an income tax return) or a similar household employment section of a return for sole proprietors or other business entities.

NEW JERSEY

Employer Reporting: Employers with only domestic workers are required to file Forms NJ-927-H, WR-30, and NJ-W-3 electronically once a year. When the employer has both domestic and business employees, the employer must file, on a quarterly basis, Form NJ-927 for annual payers, or Form 927-W for weekly payers (but not NJ-927-H for household employers), as well as Forms WR-30 and NJ-W-3.

Unemployment, Disability, Healthcare, Workforce Development, and Family Leave: For 2013, if a domestic employee earned at least $1,000 in a calendar quarter in the current or preceding calendar year, then up to $30,900 of wages is taxed to the employee at 0.3825% for unemployment insurance, 0.0425% for workforce development, 0.36% for disability, and 0.1% for family leave insurance, for a total of 0.885%. For the first three calendar years, employers pay "new employer" rates, which are, as of 2013, 3.2825% for unemployment; 0.5% for disability; 0.1175% for workforce development; and 0% for family leave. After the first three years, the employer rates are based on employment experience.

Workers’ Compensation: New Jersey household employers are required to carry workers’ compensation insurance. This requirement may be satisfied in New Jersey with the limited workers’ compensation coverage included under homeowners’ insurance policies.

Withholding: As an optional alternative, the employer may choose to withhold employee federal income taxes. However, in that case, New Jersey income taxes must be withheld as well. Form NJ-927 or NJ-927-W is used to withhold income as well as unemployment and other state taxes discussed above.

NEW YORK

Employer Registration: In New York, a domestic employer must register with the State if the employer: (a) pays more than $500 in total wages to domestic employee(s) in a calendar quarter; (b) chooses to provide unemployment insurance to employee(s), even if paying less than $500 in total wages; or (c) agrees to withhold State income taxes on behalf of employee(s). To register, the employer must apply for a federal Employer Identification Number (EIN) and submit an online or paper Form NYS-100. The employer must also submit an online or paper Form IT-2104 or Form IT-2104-E (for filers exempt from tax withholding) within 20 days of the hiring date.

Unemployment Insurance: If an employer pays wages totaling $500 or more in a calendar quarter, he must pay state unemployment insurance taxes ranging between 1.5% and 9.9%, and a new employer tax of 4.1% if applicable, on up to $8,500.

Workers’ Compensation: For household employees working more than 40 hours per week, the employer must purchase workers’ compensation insurance. The 40-hour period includes time spent sleeping, eating, completing off-site errands and being present in the household. However, the 40-hour requirement does not apply to casual part-time employees, such as gardeners, unless they are minors operating heavy machinery. Under New York law, a workers’ compensation rider to a homeowner’s policy does not cover domestic employees, and the employee cannot be required to offset workers’ compensation premiums.

Disability: An employer must purchase disability insurance for household employees working more than 40 hours per week or living in the household for 30 days or more in a calendar year. Under New York law, employers can deduct up to 0.5% of the employee’s wages, up to a maximum of $0.60 per week, to offset disability insurance premiums.

Withholding: As with federal and New Jersey income taxes, the domestic employer may choose to withhold income taxes for New York State, New York City, and/or Yonkers. In order to do so, the employer has to: (a) complete Form IT-2104; (b) provide the employee with two copies of Form W-2 by November 15; and (c) submit an online or paper Form NYS-45, with attachment NYS-45-ATT, on a quarterly basis (or Form NYS-1 if the withholding is greater than $700 in any calendar quarter).
The employer can also agree, in writing, to withhold employee contributions to health insurance, pension plans or other discretionary benefits totaling up to 10% of wages per pay cycle. The employer can also withhold statutory amounts for meals, lodging and utilities provided to the employee.


ADDITIONAL CONSIDERATIONS

Above and beyond the workers’ compensation, unemployment and disability insurance protections discussed above, as a household employer, you should notify your insurance carriers of the fact that there are domestic employees in your home, as insurance coverage for the employees’ negligence or other actions, resulting in employee damages, may be denied.

Finally, note that you must comply with the laws in any jurisdiction in which the employment relationship exists. That means that if the same employee works for you in two residences in two different states, for example, in New York and New Jersey, you must comply with the federal and both states’ legal requirements discussed in this Update.


Note that this article does not cover obligations to individuals who are truly "independent contractors." For example, a worker is not an employee if she uses her own tools, works from her home or office and provides similar services to the general public as part of a regular trade or business. On the other hand, a worker hired part-time, through an agency or from an agency listing, and paid hourly, daily, weekly or per job may still be considered an employee.