by Kathleen Webb
As of 2016, individuals who pay wages of $2,000 or more to a household worker must withhold and pay social security and Medicare taxes for those employees. Taxes are 15.3% of cash wages, which you and your employee will split, meaning you each pay 7.65% in taxes.
In order to hire any household staff and pay their taxes, you need to set yourself up as official employer. This will allow you to receive a federal and state ID so you can file the necessary taxes. For this tax year, an employer identification number (EIN) is required by January 31, 2017. Here, we outline the process to setting yourself up as a business owner.
Step 1: Determine if You Need an EIN
An EIN is a 9-digit number provided by the IRS that you’ll use on all the forms you file for your household employees.
Under U.S. requirements, you need to set yourself up as a employer if you’re hiring household staff. You do not need to pay taxes or obtain an EIN if you’re hiring an independent contractor. For example, if you’re hiring a self-employed gardener who provides services to the general public, brings his own tools, and sets his own hours, you’re working with an independent contractor. He is responsible for his own taxes.
If you hire a nanny and control when and how she works, and you provide the place of work and tools she needs to complete her tasks, then you’re hiring a household employee. In this case, you’ll need to withhold and pay taxes as well as establish yourself as an employer.
You must also verify that any household employees can legally work the United States. You can verify this information through an I-9 form, which you can download here. You don’t have to send this form to any government agencies, but you will need it on hand if authorities ever question your worker’s employment eligibility.
Step 2: Apply for an EIN
Obtaining an EIN requires a short application process. Luckily, the IRS makes it simple, and you only need to answer five questions. There are two ways to apply for an EIN:
Visit IRS.gov, and navigate to the “Apply for an Employer Identification Number (EIN) Online” page. From there, you can start the application process. You must complete the application in one session, and you can’t apply for an EIN online if the responsible party has already obtained an EIN via the online application. In this case, you’ll need to apply through option two.
You can also apply for an EIN by mailing or faxing Form SS-4 to the IRS.
Third parties must retain on file a completed copy of the Form SS-4 signed by the customer along with a signed statement authorizing the third party to file the online application.
There are several requirements to determine eligibility to receive an EIN. These requirements are as follows:
You may apply for an EIN online if your principal business is located in the U.S. or in U.S. Territories. International applicants may apply by phone.
You must have a valid Taxpayer Identification Number. This can be your Social Security Number (SSN), an existing employer identification number (EIN), or an Individual Tax Identification Number (ITIN).
You can only apply for one EIN per responsible party per day.
If you are located in New York, South Carolina, or Massachusetts, you will need to obtain your state and federal information in one session. You can do so with the links provided here. For residents in other states, be sure to check with your local requirements.
Step 3: Save a Copy of Your EIN Records
The amount of time it takes to receive your EIN will depend on the method you use to apply, so be sure you give yourself enough time to obtain an EIN before filing your taxes. If you apply by mail, expect to receive a response within four to five weeks. If you fax in your application and include a return fax number, expect a response within one week. If you apply on line, you can obtain an EIN immediately.
If you haven’t received your EIN by the time you file taxes, write “Applied For” with the date you applied in the space for your number. Do not use your SSN.
Once you have a confirmed EIN, be sure to save this official IRS confirmation document for your records. If you ever lose your EIN, you can contact the IRS to retrieve it. You cannot cancel your EIN after you’ve received it, but the IRS can close your business account. Even with a closed business account the EIN will still be available to you for future use.
What if You Already Have a Business?
If you already own a business, use caution! Since your household employees, such as nannies, are not contributing members to your business, you cannot file their employment taxes through an existing company’s payroll. This practice is illegal. Likewise, you can’t add a household employee to your company’s group health insurance or business workers’ compensation insurance. If you do, chances are the insurance company won’t agree to pay their bills if something actually happens.
Instead of looking for shortcuts in the employer tax reporting process, file taxes the right way by establishing yourself as a household employer. The exception to this is if your business is a sole proprietorship or if you run a for-profit farm. Otherwise, you will need to handle these taxes outside of your existing business, and household employees will need to get their own individual health insurance policy.
Be sure to familiarize yourself with household payroll wages so you know what type of compensation to report on your taxes. This includes compensation like salary and bonuses, overtime, and gift cards, which you’ll have to keep detailed records of. You’ll also have to learn which tax documents you need to file and give your household employees when tax season rolls around.
Kathleen Co-founded HomeWork Solutions in 1993 to provide payroll and tax services to families employing household workers. Kathleen has extensive experience preparing ‘nanny tax’ payroll taxes. She is the author of numerous articles on this topic and has been featured in the Wall Street Journal, Kiplinger’s Personal Finance, and the Congressional Quarterly. She also consulted with Senate staffers in the drafting of the 1994 Nanny Tax Law.