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6 tips on handling taxes for household employees

| Thursday, March 28, 2013, 12:01 a.m.

A hefty tax bill is a possibility for anyone who pays a nanny, housekeeper, gardener or other household employee enough in annual wages to trigger a bevy of requirements under tax laws.

This year, that financial threshold is $1,800, and it makes the person who hired the household employee responsible for paying that worker's federal and state payroll taxes, just like any other business owner. They also must reflect in their own annual tax return that they had a household employee.

“People think if they pay this person in cash, they don't have to report it, and the recipient doesn't have to pick it up as income,” says Cindy Hockenberry, manager of research for the National Association of Tax Professionals. “But there are taxes due on that, and the [Internal Revenue Service] wants their taxes.”

Here are six tips on how to make sure you're not running afoul of the tax man when hiring household help:

• Sort out: Independent contractor or household employee? Whether you're on the hook for your nanny or maid's payroll taxes begins with determining if he or she meets the IRS definition of a household employee or an independent contractor.

The IRS defines a household employee as someone hired to do work in or around a home, at the direction and control of the person who lives in the home. Meaning: You tell them what to do and how to do it and perhaps provide the supplies.

So who wouldn't be a household employee? If workers can control how they do the work, are self-employed or bring their own tools, they're likely to be considered independent contractors.

• Determine which taxes you are expected to pay: If your nanny or other hire meets the household employee standard, it all comes down to whether you pay the person cash wages of $1,800 or more.

If that's the case, you are required to pay 15.3 percent of their wages in Social Security and Medicare taxes.

Be aware that you also could be on the hook for federal and state unemployment taxes.

• Decide early how you're going to pay: The IRS gives you the option to withhold your employees' share of their Medicare and Social Security taxes from their paycheck or to elect to pay their share yourself.

• Verify an employee's legal status: The IRS requires that employers and their hires complete an employment eligibility verification form, dubbed I-9, before the end of the employee's first day of work.

The form requires that non-U.S. citizens provide information backing up their legal employment status and that the employer examine the information against a list of acceptable identification documents.

• Keep solid records: It's important to keep accurate records of all wages and federal and state taxes you pay or withhold on behalf of your employee.

• Get help: Instead of dealing with the intricacies of the U.S. tax code, you can pay an accountant or one of the many companies that cater to handling payroll and tax concerns for domestic employers.

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