Finance Q&A

Question: What legal requirements do I need to consider when hiring household help?

Answer: When you hire someone to work in your household, you become an employer with specific obligations to your employee and the government.

Before your household employee begins working, verify his identification and employment eligibility. National employers have made headlines recently when federal agents discovered that illegal immigrants using false identification were working in manufacturing plants. Don’t get stuck in a similar legal mess.

On your employee’s first day, you and your employee should fill out the U.S. Citizenship and Immigration Services (USCIS) Form I-9. Your household employee needs to provide acceptable documents, which are listed on Form I-9, that establish identity and employment eligibility. The completed form doesn’t need to be submitted to any government entity, but should be kept on hand in case a government official wants to review it.

As an employer, you’re also obligated to pay taxes. You may think paying your nanny or housekeeper “under the table” is an accepted practice, but the government thinks differently. Just ask Zoe Baird, nominated in 1993 as attorney general by then President Bill Clinton. Baird had to withdraw her name from consideration after it was discovered that she failed to pay the appropriate taxes for her nanny and driver. Both workers were also undocumented aliens.

If you fail to pay the appropriate taxes for your household employee and the government finds out, you are liable for paying all unpaid employer taxes and, possibly, interest and fines. You could also face prosecution.

Most likely, if you have a household employee, you should be paying some kind of federal and, perhaps, state taxes. According to the Internal Revenue Service, a household employee is defined as a worker you hire to do household work. You control what work is done and how it is performed, while also providing the appropriate tools or equipment.

The exception to this definition is a worker who controls how the work is done and provides his or her own tools or equipment. Often, this type of worker is self-employed with an independent business and offers his services to the general public.

For those who employ household workers, the following federal taxes apply:

* If you paid your household employee $1,500 or more in 2006, then you must withhold and pay Social Security and Medicare taxes, which adds up to 15.3 percent of the total cash wages. Your share is half of that, or 7.65 percent. Your employee’s share is the remainder, which he can pay by withholding some of his wages or you can choose to pay for him.

* If you paid your household employee $1,000 or more last year, you are also required to pay federal unemployment tax (FUTA). This amounts to 0.8 percent of the employee’s cash wages after using tax credits against the FUTA tax, and it must be paid from your own funds.

Exceptions exist for both taxes and are outlined by the IRS in its Household Employer’s Tax Guide (Publication 926).

You may also have to pay a state unemployment tax and other taxes that vary by state. Check with your state unemployment tax agency to find out your tax requirements.

Your household employee may ask that you withhold federal income tax from his wages, even though you’re not required to do so. If you and your employee agree to do this, make sure the employee fills out the Employee’s Withholding Allowance Certificate, or Form W-4.

Make sure to keep records of all your tax forms and employee’s pay stubs, which should list both cash and non-cash wages, Social Security and Medicare taxes that you withhold or agree to pay, and any federal and state income tax you withhold. Maintain copies of your employee’s work schedule, too.

If you pay Social Security and Medicare taxes or withhold federal income tax, have on hand a copy of your employee’s name and Social Security number as it appears exactly on his Social Security card.

Associated Press