New 'Nanny Tax' guidance issued by IRS
Provided by Freal and Saulness, CPAs, Woodinville
Regarding the recent change to reporting taxes due on wages paid to household employees, under provisions of the Social Security Domestic Employment Reform Act of 1994, reporting and payment of FICA, FUTA, and withheld federal income tax of household employees are required on an annual rather than quarterly basis (effective Jan. 1, 1995).
In addition, household employers are liable for FICA taxes only for employees to whom they pay $1000 or more during the year (effective Jan. 1, 1994). The IRS has issued guidance on implementing these new rules (Notice 95-18).
If the amount paid to a household employee is $1000 or more per calendar year, all wages, (including the first $1000) paid to the same employee are subject for FICA taxes. An exception to this rule concerns individuals under the age of 18; they are exempt from FICA taxes for domestic services performed in a private home as long as this service is not their principal occupation.
Beginning in 1995, household employers will now file the new Schedule II with their individual income tax returns, instead of Form 940 and the obsolete Form 942. Schedule H will be used to report FICA, FUTA, and any withheld federal income taxes. In addition, household employers must furnish their household employees with Forms W-2, Wage and Tax Statement by January 31 of the following year.
Although the Act changed reporting and payment requirements for FUTA taxes, the threshold for FUTA tax liability remains the same. Also, the Act did not change the law regarding income tax withholding, which continues to be required only if both the employer and employee agree to it.
To cover the additional tax obligation, the IRS suggests that household employees can increase their quarterly estimated tax payments or request their employers to withhold more income tax from their wages. Penalties for underpayments of estimated tax due to employment taxes reported on Schedule H will not apply before 1998.
Employers who employ workers who are not household employees are still required to file Form 941 on a quarterly basis for those employees. Although Circular E states that sole proprietors who file Form 941 for business employees must include the employment taxes for household employees on Form 941 and Form 940 (or 940-EZ), the new guidance allows employers with both household and non-household employees to choose from two options for reporting employment taxes:
See IRS Publication 926, Employment Taxes for Household Employers, and IRS Publication 15, Circular E. Employer's Tax Guide.
- They may report FICA and FUTA taxes and any income tax withholding for household employees annually on Schedule H, and report FICA and FUTA taxes and any income tax withholding for other employees on Form 941 and on Form 940 (or 940 EZ); or
- Report FICA taxes and any income tax withholding for all employees quarterly on Form 941 and report FUTA taxes annually for all employees on Form 940 (or 940-EZ).