Household Employee Tax! What do I do?

Hey, Mark Kohler here. Excited to talk to you about the nanny tax. No, I'm not. It's a crappy tax, but we're going to talk about it anyway. I thought it was kind of fun that you're in there too. Should we not start with that? Okay, let's just keep going. All right, Buckle up. No, I'm not. I'm not excited about it. This is crappy tax. No one wants to talk about it. But you got to know if you have someone helping you out in your house. So let's dive into it, alright? So, yes, this has been referred to as the nanny tax, but it's really the household employee tax. It's been updated every year. Some IRS publications for you that you would want to know about. I put them down in the notes if you really want to get into this and geek out. But I'm going to try to summarize it quickly and distinctly with some steps so that you can decide if it applies to you and what you do if it does. So you may think, I don't really need to worry about this. I'm not running for public office and some reporter's not going to be in my face asking about my nanny and did I pay taxes and are they a citizen. But you need to worry about the other interviewer and that's the irs. They are upping their audits on this and too many people are paying workers under the table and the IRS doesn't like it. And there's some risks here. Now, why do I say risks? I've got to hit that. Because I want you to pay attention and finish this video. And I've got a link to my article on this topic below. But forgive me if I'm a little crass or offer a little satire. I want to keep you interested in this video, but let's hit the risks. Number one, you fire them and they're pissed off and so they go try to collect unemployment. And when they go to the state agency to collect unemployment, you're not going to be in the system because you haven't done the proper paperwork. So they're mad. They make noise at the state, which is going to alert the IRS as well. And now you're getting audited by who knows how many agencies because you paid them under the table. Watch out for that. And you can never know if you have scorned employee worker that's mad, they're broke or upset and they could make noise. Number two is what happens if they get hurt on the job. That's a crappy one. No one wants anybody getting hurt on our property. Right? Well, if they get hurt and you're not carrying what we call workers comp, not wt white trash, we're talking workers compensation. And if you haven't talked to your homeowner's insurance agent and company and you don't know if a household employee is covered, they get hurt. Now we're talking personal injury lawsuit, and those are ugly. And they could get at the equity in your home and it could be a big mess. So these are the risks generally that we're talking about here. You want to treat your employee, household worker, nanny correctly. Okay, step one, and that is determining, even if this tax applies to you, are you affected by this tax? Now, remember in the risks I talked about them maybe getting hurt on the job. Even if the tax doesn't apply to you, I would look into your homeowner's policy and make sure that you've got some coverage. If they're working at your property and they get hurt, even if you're paying them under the table, even if you're trying to get away with the 1099, the risk issue is separate from the tax issue, so be careful. So the tax issue, it basically applies to anybody working in your house as a nanny, babysitter, landscaper, pool boy, handyman, yada, yada yada. Now, if they're working in your house and working for you exclusively, think of Alice in the Brady Bunch, then they're probably a household employee. But if they're working for multiple homes, the pool guy comes by once a week and he's maintaining 20 other pools. Your housekeeper comes by for a half a day once a week and she's cleaning 20 other homes. You're going to be okay because they're. They're an independent business and you're going to be able to issue them a 1099 NEC. Now, you may want to ask them, are you carrying insurance? I want to get a W9 from you. I want to make sure you're legit and all those things. Because if you go, well, I'm just going to pay him cash and yada yada. Well, you want to make sure you're okay. If they get hurt. Again, are they carrying their own insurance? And so you don't want your insurance company freaking out because you've been paying someone under the table and never legitimately determined if they're a business. Okay? So that's kind of this 1099 subcontractor thing. Now, I've put a link to another article of mine down below, where I talk about what determines a subcontractor. And states are really increasing their scrutiny on this, and they've started to create what's called the ABC test that's in multiple states, California and Texas being the big ones that have adopted this lately. So if they're not a subcontractor, they're working for you exclusively. And in 2020, you paid them more than $2200, and in 2021, you paid them more than $2300. They're going to generally be a household employee. Now, if they're a household employee, you're going to say, all right, I paid him at least this much. I got to deal with it. Now, there's one last exemption. Okay, here's the way to get out of this. Because you would say, well, hold it. I have my mom come by grandma watching the kids every week. Do I really need to start paying her? No, the exemptions are a parent, someone under age 18, a child of yours under age 21. And was there one other one here I wanted to look? A spouse, you know, stay at home dad, Stay at home, Mom. If anybody feels fits into these categories, then you don't have to pay this tax. And I would say if you're paying them less than 2,300 bucks, you're going to generally be okay. So look at these two issues and see if you can get out of this tax and always be worried about them getting hurt on the job. And if you can fit into one of these boxes, don't watch this video anymore. If not, keep watching. Okay, I like to go to step two and just kind of figure out what the damage is. Some people go, well, Mark, I'm going to have a household employee no matter what. Well, how much is it going to cost you? I don't know. I'm just going to do it. I don't think that's very responsible. If you're going to have a landscaper, a housekeeper, a nanny, let's really figure out how much it's going to cost you before you make the decision. Now, some of you are like, well, Mark, I'm watching this video because I already have a nanny, and I got to figure out how to pay them and do it right and get above board. All right, that's cool. We're going to go to step three, but maybe watch step two here and figure out how much I'm going to end up going out of pocket. So there's four taxes you got to worry about or Four costs. Number one, you've got fica, the F word. What? The fica? That's right. Use it as a swear word if you need to. That's Social Security and Medicare, and that is going to be 7.65%. If you end up withholding that from their check and then matching it, you're going to be out 7.65 at least. Now, some employers go, I don't want to withhold it from their check. I'm just going to pay it for them, period. Well, then multiply that by 2. You're going to be out 15.3%. So if you pay them $10,000 during the year, you're going to have to come up with $1,530 in FICA. So right there, whatever you pay your household employee, add another 15% to it. If you're going to not withhold, but you're just going to pay it for them. Number two, you've got futa. Now, I talked about one of the risks of them trying to go collect unemployment. And if they go try to collect unemployment, you have what's FUTA and SUTA come in to kill you. And that's federal unemployment tax and state unemployment tax. See, what you're doing with a household employee is you're paying into a fund so that if they go collect unemployment, they can collect unemployment for a while. And if you noticed, in 2020, sometimes people need to collect unemployment. So you've got Futa and Suta, and these rates are going to be actually quite different. The one for the feds is 6% on the first $7,000 and then you're done. So the maximum you're ever going to pay in Futa is $420. Okay, so there's a cost. This one is based a percentage based on how much you pay them. Futa, once you hit seven grand, and if you have a nanny, you're probably going to pay more than seven grand, you're going to hit 420. Now, the state one can vary dramatically by state. And some states don't even require you to pay it on a household employee. Some states, they'll have a bare minimum and it's only up to a certain amount, blah, blah, blah. So it's easy to Google and say, plug in Michigan State unemployment for a household employee. Now, if you call the state number, don't give them your name and address. Just ask for some advice. You don't want to put yourself on the radar, but go to the state and find out. I usually like to estimate about 2% of whatever you're going to end up paying the household, employee, nanny, housekeeper, whatever it is. And so if you're paying them 10,000 during the year, then that's going to be around 200 bucks. So just plug it in and figure that out. The fourth one, which again is a crapshoot because it's going to depend on your homeowner's insurance and what state you're in, is workers comp. Now, for those of you that have never heard of workers comp, just quickly, it's an insurance policy. It's a state regulated policy that you're going to pay into. And if anybody gets hurt on the job, they go collect. Workers comp. Now, let me tell you, you may be complaining about this, but this is a good thing because if they get hurt, workers comp takes care of it. In fact, that's all they can do. They can't file a personal injury suit against you unless you were really negligent. Making them get on top of the roof in a snowstorm and shovel off the roof with no protective gear, they might say you were a little negligent, I don't know. But anyway, as long as you're a reasonable employer not asking to do something highly risky, you're going to be okay. So you're going to try to figure out how much of these four things are going to cost. Come up with a total. I'd like to usually come up with a percentage of whatever you're going to pay an employee. Now, what I tell most people is the workers comp is going to be spread out over more employers and more wages. So this percentage can go down a numerator, denominator, accounting type of way. But I tell people, whatever you're going to pay a household employee, plan on 15% just to be safe. So you're going to pay someone 10,000 and withhold, you're going to be at approximately 15% for all this stuff, 7.65 this percent, this percent and whatever workers comp is. Now, if you're not going to withhold out of their paycheck, that could be up as high as 20% or more. So if you pay someone 10 grand during the year, maybe plan on about 20% of that on top going out of taxes at the end of the year. Now, I'm going to give you procedure, but this is the budget. And you kind of want to know what is the budget for this household employee based on how much it's really going to cost me at the end of the day. Now we are to step three. Now on step three, there's several things you need to get from your employee when you hire them. And I'm going to recommend probably five things here. One of them is for you. One of them is a mutual deal. I think you're going to like this checklist. And by the way, there are some great websites out there on how to screen what to get on in riding with a nanny. There's some great nanny employer websites. I would recommend you really do some due diligence if you're going to go down that route. But of course, of course this video is about more than just nannies. It could be any household employee. But, but that would be a good tip, is to just do your homework on the proper way to find and hire a nanny. Okay, but for any household employee, we're going to deal with five or six things. So number one, you need to get from this worker a W4. Now this W4 is your typical employment type piece of paperwork form. I've got a link to it in my article down below. You can get on the article and start downloading all the stuff I'm referring referencing. In fact, I'll just say it now, I've got publications at the IRS on household employees and FAQs on the IRS website on this. So if you, if you really are going to go down this path and this little video is helpful in any way, print out the article or save it on your desktop and you can start downloading all the links that I've given in my article that you're going to need. So you're going to get a W4, which is basically that withholding form for, for the Feds, and you're going to get one for the state. So whatever state you're in, if you're in a state of Washington or Texas or Florida, for example, there's nine states that don't collect state income tax. But again, you're going to want to get the Fed withholding form and the state. So I'm just going to call it W4. That's your first form that you really, really need to worry about and make sure the employee fills it out before you pay them. Number two, you're going to want to get an i9. The i9 is basically that employee verification form that they're a citizen. You may not want to ask that, but you've got to because you could get in big trouble if you don't. Now this is a form produced by the Homeland Security and easy to download Easy to have someone fill out. Now, if they lie about their Social Security number that's on them, at least get them to fill it out. Number three, one that I love is to get their banking information. Now, you may be wanting to pay them cash or Venmo them or Apple Pay or PayPal, whatever in the past, but once you put them on the grid as a real household employee, and we're going to come to step four where we get a service involved, probably to help you do this so that you don't have to stress out about all the T's and I's get their banking info because a direct deposit is going to be the way to go. And sometimes with Venmo and PayPal and Apple Pay and all those, they're convenient to make small payments to people and in your office pool for March Madness or your fantasy football league. But when it comes to paying a household employee, just get their bank account info so that you can do direct deposit. And the company you hire to do this crap for you, they're going to want it. Okay, number four, and this is a big one, is I want you to get some sort of employment contract in place. We at our law firm help clients all the time with basic forms like this, and we can help by either giving you a template and tailor it to your needs, answering some questions. It doesn't have to be thousands of dollars. You could budget just an hour with one of my attorneys. Our law firm link is down below and phone number. But this isn't a sales pitch to have you calling up and having us do those basic contracts. You could more than likely download something off the web and just really get into it. It's your contract. You're supposed to know it and understand it. We're just there to help advise, guide and look for some red flags. If you try to prepare your own contract, that's okay. Take a shot at the contract, hire us to look over it and go, eh, you missed a few things. Here's some provisions I'd add. So own your own employment contract, whether again, it's a maid, landscaper or nanny. So contract up. Don't do this on a freaking handshake. And number five, you've got to go out and get something called an electronic identification number, an ein. And you're going to say, well, I'm not a business. Why do I have to get an ein? It's because you're doing payroll and there's going to be some state ID numbers you're going to have to get as well. Now if you're going to hire a service, which we're going to come to in step three or four here in a moment where we at step three. So on step four, we're going to talk about using a service, but you're going to have to go out and apply for an ein. Now, if you get a service involved, they may take care of all that for you. If you're going to DIY it and do it on your own, then I provide links for that in my article below. But ein. And this is probably a good time to talk about a good chance for me to talk about the fact this is not going to be a tax write off for you. If this is a personal service in your home to make your life easier and that's how the IRS sees a nanny, you're not going to be able to write this off. So don't use an EIN under your regular business because I don't want to suck your nanny into your other business and create liability exposure there that this is going to be an independent EIN for you as a household employer. That's why you're getting insurance, to make sure that you're not going to lose your shirt in some sort of accident. But get the ein, don't commingle it with your other business affairs and don't think this is going to be a write off. Now you may say, well, Mark, hold it, I can get the child care tax credit. A child care tax credit is typically paying a third party. They're gonna, it's gonna be a whole other application and a whole other website at the IRS to study up on. Again, I put a link to that in my article. It's at the very end of my article. If you're gonna try to get some sort of tax credit or tax help with this. But typically with a nanny, it's a wishful thinking that it's gonna be a tax write off. Now this brings us to step four and the final step. How are you gonna freaking take care of all this paperwork and the headache? Well, in my article I go through several options and I'm just going to summarize these quite quickly. You've got a B and C. Now A is easy, schmeasy. And frankly it may be the most affordable too. There's some great companies out there that just do the payroll service for you. So option A and sorry, I'm going to call a step four. Getting it. Getting her done. Getting her done. A little country reference there. So we're going to get her done and A is use a service. And I'm not opposed to this. If I was, believe it or not, I'm a cpa. I did payroll back in the day when I was a young accountant. But if I do payroll now, I probably screw it up. So I'm going to use a service. It's cheap, it's easy and cheap in the sense that you can waste a lot of your time that could be more valuable doing the payroll yourself. But I'm going to give that option here in a moment, but just price them. Now, down below, I've given some links to some services that are going to take care of all the paperwork, direct deposit, yada yada. So I would at least price it and look at your options. And there's a whole bunch out there. And I linked one of the ones I really like down in my article and I update that from time to time. So I don't want to say it here on the video, but down in the article I've got some links. Your current accountant might do this, your cpa, but even at my CPA firm paying a nanny, unless we go with option C, which is a Schedule H option, which I'll come to if you're going to do regular paychecks and withhold and kind of keep it legit, even your typical accountant or CPA isn't going to be able to beat the pricing on some of these services that have just made it so simple to use, okay, option B is you're going to do it yourself. That's the DIY. And frankly, you're going to do it on QuickBooks. I'm just going to be blunt. That's probably going to be the easiest way for you to handle this is to download QuickBooks online or a desktop version, get the payroll module and learn how to do it yourself. Now, for some of you that maybe have a small business already and you're doing payroll for your company and you get it, and you know what FUTA and SUTA and Workers Comp and all the ID numbers are, and when your deposits are done quarterly, that can be easy for you. So I'm not saying the DIY option is all bad. I'm just saying if you don't know what you're doing and you've never done it before, I might recommend use a service for the first year or first six months. And then if you go, well, this is freaking easy, I can do it myself, that's fine, go get QuickBooks on the payroll module and go for it. And I've done That before, I've done payroll for myself in my own little small business. Back in college when I had several small businesses cutting my teeth on the accounting world, I loved it. I'm a big fan of QuickBooks. Okay, option C. What I like about this is it's legit. It's simple. If you didn't do a payroll service last year for 2020 and you're a little nervous that you might get audited, and you're like, oh, I never did this, then you can amend 2020 and go tidy it up by using what's called Schedule H. Schedule H is a form where the IRS said, hey, if you didn't do all that payroll crap during the year with a service and do weekly paychecks and blah, blah, blah, this is the safe harbor. Just include Schedule h on your 1040 because it's on your personal return. So when you file your personal return, and again, if you've already filed and go back and amend and add this, and on Schedule H, you're going to end up paying the 7.65 for your employee and doing the match. So that's the 15.3 for the FICA. There's a line for SUTA. I mean, sorry for FUTA, I can't remember at the moment on the SUTA issue, but you're going to get your FUTA and FICA taken care of on the Schedule H. And any injuries or water under the bridge, hopefully there was none. So you can kind of get your insurance dialed in and worker's comp moving forward. Get on the state website, find out if the SUTA can be paid for for last year. Just kind of clean house. That's option three or option C as in Charlie. And we've done this a lot for clients because they don't want to pay for the service throughout the year. But look at the cost here. If you're going to compare option A and option C, you're picking up the 7.65 here. If you use a service, I'd recommend you try to withhold it from your employee's paycheck. That way you're not paying the bill for them. But if you're going to pay the bill for them anyway, what the heck do you need the service for? Maybe just go to Schedule H, times it by two, do your FUTA and you're out the door. You only got to worry about your suta, the state and your workers comp at that point. And it's one form on your tax return. An accountant isn't going to Charge as much for this one form at the end of the year as you pay a service throughout the year for all four quarters. So think about it. Schedule H could be a legitimate option. Okay, in summary, I have a couple last tips. First of all, to keep your household employees working fast and hard, consider stocking your fridge with Rockstar Recoveries. Zero sugar, no carbonation, and only 10 calories. I wish they paid me to say that, but that's just my inside joke there. All my employees know that there's always a rock star in the fridge. It keeps them working harder and faster. So consider that number two, all joking aside, be careful paying anybody working on your property under the table. Now, if it's going to be under 600 bucks and you don't have to issue a 1099 or they kind of act like a household employee for a while and it's going to be under 2,200 bucks and you know, your homeowner's insurance would cover any problems. Okay, I get it. I've done that myself. You know, just hire some kids in the neighborhood to do a little work. And I know if they got hurt, I've got homeowners. But once you start paying someone regularly to come every day, four or five times a week, and they're not really working for anyone else in the community, and they're really not their own business or subcontractor, you're exposed. And if things get ugly with that employee or an audit comes up for any reason, for any other ancillary issue, this could be an exposure item for you. So I'm going to leave you with these famous words, get legit. That's the moral of the story in this video. And you'll sleep better at night, not have to worry about an audit or potential personal injury lawsuit. Get your household employees on board, and I think you're going to be a lot safer and a lot happier. See you around. Don't forget to subscribe. And I've got great live broadcasts every week and my podcast and all those extra resources are are down below in the description. Please check it out. Hope to see you around. Thanks.