Do You Need To Pay Employment Taxes?(p4)

If you have a household employee, you may need to withhold and pay social security and Medicare taxes, pay federal unemployment tax, or both. To find out,  
read Table 1.

You do not need to withhold federal income tax from your household employee's wages. But if your employee asks you to withhold it, you can. See Do You Need To Withhold Federal Income Tax? on page 6.

If you need to pay social security, Medicare, or federal unemployment tax or choose to withhold federal income tax, read Table 2 below for an overview of what you may need to do.

You should contact your state unemployment tax agency to find out whether you need to pay state unemployment tax for your household employee. For the address and phone number, see the Appendix near the end of the publication. You should also determine if you need to pay or collect other state employment taxes or carry workers' compensation insurance.

The social security tax pays for old-age, survivors, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance.

Both you and your household employee may owe social security and Medicare taxes. Your share is 7.65% (6.2% for social security tax and 1.45% for Medicare tax) of the employee's social security and Medicare wages. Your employee's share is 4.2% for social security tax and 1.45% for Medicare tax.

You are responsible for payment of your employee's share of the taxes as well as your own. You can either withhold your employee's share from the employee's wages or pay it from your own funds. If you decide to pay the employee's share from your own funds, see Not withholding the employee's share on page 6. Pay the taxes as discussed under How Do You Make Tax Payments? on page 8. Also, see What Forms Must You File? on page 8.

You figure social security and Medicare taxes on the social security and Medicare wages you pay your employee.

If you pay your household employee cash wages of $1,700 or more in 2011, all cash wages you pay to that employee in 2011 (regardless of when the wages were earned) up to $106,800 are social security wages and all cash wages are Medicare wages. However, any noncash wages you pay do not count as social security and Medicare wages.

If you pay the employee less than $1,700 in cash wages in 2011, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.

Cash wages include wages you pay by check, money order, etc. Cash wages do not include the value of food, lodging, clothing, and other noncash items you give your household employee. However, cash you give your employee in place of these items is included in cash wages.

Certain state disability plan payments that your household employee may receive are treated as social security and Medicare wages. For more information about these payments, see Instructions for Schedule H (Form 1040), Household Employment Taxes, and the notice issued by the state.

Do not count wages you pay to any of the following individuals as social security and Medicare wages, even if these wages are $1,700 or more during the year.

1. Your spouse.
2. Your child who is under the age of 21.
3. Your parent. Exception: Count these wages if both the following conditions apply.
   1. Your parent cares for your child who is either of the following.
      1. Under the age of 18, or
      2. Has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter.
   2. Your marital status is one of the following.
      1. You are divorced and have not remarried,
      2. You are a widow or widower, or
      3. You are living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.
4. An employee who is under the age of 18 at any time during the year. Exception: Count these wages if providing household services is the employee's principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Also, if your employee's cash wages reach $106,800 (maximum wages subject to social security tax) in 2011, do not count any wages you pay that employee during the rest of the year as social security wages to figure social security tax. (Continue to count the employee's cash wages as Medicare wages to figure Medicare tax.)

If you provide your employee transit passes to commute to your home, do not count the value of the transit passes (up to $230 per month for tax year 2011) as wages. A transit pass includes any pass, token, fare card, voucher, or similar item entitling a person to ride on mass transit, such as a bus or train.

If you provide your employee parking at or near your home or at or near a location from which your employee commutes to your home, do not count the value of parking (up to $230 per month for 2011) as wages.

If you reimburse your employee for transit passes or parking, you may be able to exclude the reimbursement amounts. See Publication 15-B, Employer's Tax Guide to Fringe Benefits, for special requirements for this exclusion.

You should withhold the employee's share of social security and Medicare taxes if you expect to pay your household employee cash wages of $1,700 or more in 2011. However, if you prefer to pay the employee's share yourself, see Not withholding the employee's share, next.

You can withhold the employee's share of the taxes even if you are not sure your employee's cash wages will be $1,700 or more in 2011. If you withhold the taxes but then actually pay the employee less than $1,700 in cash wages for the year, you should repay the employee.

Withhold 5.65% (4.2% for social security tax and 1.45% for Medicare tax) from each payment of social security and Medicare wages. You can use Table 3, on page 18, to figure the proper amount to withhold. You will pay the amount withheld to the IRS with your share of the taxes. Do not withhold any social security tax after your employee's social security wages for the year reach $106,800.

If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

On February 6, 2011, Mary Brown hired Jane R. Oak (who is an unrelated individual over age 18) to care for her child and agreed to pay cash wages of $50 every Friday. Jane worked for the remainder of the year (a total of 46 weeks). Mary did not give Jane a Form W-4 to request federal or state tax withholding. The following is the information Mary will need to complete Schedule H, Form W-2, and Form W-3. See pages 19 and 20 for completed examples of Schedule H, Form W-2, and Form W-3 for 2011.

Total cash wages paid to Jane		$2,300.00 ($50 x 46 weeks)
Jane's share of:
	Social security tax	$96.60 ($2,300 x 4.2% (.042))
	Medicare tax	$33.35
		($2,300 x 1.45% (.0145))
Mary's share of:
	Social security tax	$142.60 ($2,300 x 62% (.062))
	Medicare tax	$33.35 ($2,300 x 1.45% (.0145))
Amount reported on Form W-2 and Form W-3:
	Box 1: Wages, tips		$2,300.00
	Box 4:  Social security tax withheld		96.60
	Box 6:  Medicare tax withheld		33.35

For information on withholding and reporting federal income taxes, see Publication 15, (Circular E), Employer's Tax Guide.

If you prefer to pay your employee's social security and Medicare taxes from your own funds, do not withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.

In 2011 you hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,700 or more for the year. You decide to pay your employee's share of social security and Medicare taxes from your own funds. You pay your employee $100 every Friday without withholding any social security or Medicare taxes.

For social security and Medicare tax purposes, your employee's wages each payday are $100. For each wage payment, you will pay $13.30 when you pay the taxes. This is $5.65 ($4.20 for social security tax + $1.45 for Medicare tax) to cover your employee's share plus $7.65 ($6.20 for social security tax + $1.45 for Medicare tax) for your share. For income tax purposes, your employee's wages each payday are $105.65 ($100 + the $5.65 you will pay to cover your employee's share of social security and Medicare taxes).

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Like most employers, you may owe both the federal unemployment tax (the FUTA tax) and a state unemployment tax. Or, you may owe only the FUTA tax or only the state unemployment tax. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency. See the list of state unemployment agencies in the Appendix for the address.

For the period of January 1, 2011, through June 30, 2011, the FUTA tax is 6.2% of your employee's FUTA wages. However, you may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.8%. For the months after June 30, 2011, the FUTA tax is scheduled to decrease to 6.0% of your employee's FUTA wages. You may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%.Your credit for 2011 is limited unless you pay all the required contributions for 2011 to your state unemployment fund by April 17, 2012. The credit you can take for any contributions for 2011 that you pay after April 17, 2012, is limited to 90% of the credit that would have been allowable if the contributions were paid by April 17, 2012. (If you did not pay all the required contributions for 2010 by April 17, 2011, see Credit for 2010, later.)

If the due date falls on a Saturday, Sunday, or legal holiday, payments are considered timely if made by the next business day. Pay the tax as discussed under How Do You Make Tax Payments? on page 8. Also, see What Forms Must You File, later.

The 5.4% credit is reduced for wages paid in a credit reduction state. For 2010, Indiana, Michigan, and South Carolina are credit reduction states. See the 2010 Instructions for Schedule H (Form 1040).

Figure the FUTA tax on the FUTA wages you pay. If you pay cash wages to all of your household employees totaling $1,000 or more in any calendar quarter of 2010 or 2011, the first $7,000 of cash wages you pay to each household employee in 2011 is FUTA wages. (A calendar quarter is January through March, April through June, July through September, or October through December.) If your employee's cash wages reach $7,000 during the year, do not figure the FUTA tax on any wages you pay that employee during the rest of the year. For an explanation of cash wages, see the discussion on Social security and Medicare wages on page 4.

Do not count wages you pay to any of the following individuals as FUTA wages.

• Your spouse.
• Your child who is under the age of 21.
• Your parent.

The credit you can take for any state unemployment fund contributions for 2010 that you pay after April 18, 2011, is limited to 90% of the credit that would have been allowable if the contributions were paid on or before April 18, 2011.