Taxes on Domestic Help

• If you pay any individual providing domestic help more than $1,700 in 2009, you are liable for what has become known as the "nanny tax." There are exceptions to this rule: if the domestic help is your parent, spouse, or child (younger than 21), the tax is escaped. People younger than18 whose principal occupation is not household employment (for example, a student) also qualify for the exclusion.
  
  

Not Just for Nannies

• The nanny tax isn't just for nannies. Individuals you pay to mow your lawn, plow your drive, cook your meals or dust your knick-knacks also qualify. The key that triggers the tax is how much you pay each per year--unless they qualify for one of the exceptions above).
  
  

Three Types of Taxes

• What Uncle Sam is trying to enforce is federal employment taxes for domestic help. Federal employment taxes fall into two basic categories: FICA (which includes Social Security and Medicare taxes) and FUTA (federal employment tax). Depending on your state of residence, you are likely to owe unemployment taxes and perhaps even disability taxes on the state level as well. Ignorance is not bliss in this instance: if you are unsure whether you owe employment taxes in your state, check with an accountant or the state agency involved. A list of state agencies can be found in IRS Publication 926
  
  

FICA and FUTA

• FICA is by far the most formidable employment tax you will be asked to pay. As of this writing, the employer portion is 7.65 percent of domestic help wages. The domestic employee is expected to fund the other 7.65 percent. If you use a payroll service, you can have the employee's 7.65 percent withheld from their wages. If you don't bother, you as the employer get to pay the domestic help's part, for a total tax hit of 15.3 percent..
  FUTA tax rates are much lower---only .8 percent of the first $7,000 in wages paid to domestic help each year. If you just started paying domestic help in 2009, you won't have to worry about FUTA yet. This low FUTA rate is only available if you paid your state unemployment taxes in a timely fashion. Otherwise, FUTA jumps to an expensive 6.5 percent of domestic help wages.
  
  

Easiest Way

• Unless you are using a payroll service, any payroll tax due on domestic help wages will be treated as part of your personal tax liability for the year. You can calculate the FICA and FUTA due, and report it, on IRS Schedule H. If your taxes have been underpaid during the year due to the nanny tax, the IRS will tack on penalty and interest. You can void such an unhappy result by making larger quarterly estimated tax payments, or having more withheld from your paycheck.