If you hire someone to work in your home (for example, to provide child care services), you are responsible for complying with a variety of federal and state employer regulations. If you’re looking for a complete set of rules, you can start with IRS Publication 926 here. I’ll give a brief summary, which should help you decide whether to try and go it on your own, or have me provide some help.
A few things are worth mentioning at the outset.
- In almost all cases, if you hire someone to work in your own home as a child care provider, that person is an employee, not an independent contractor – even if they say they’d prefer not to have taxes withheld from their pay. So you can’t just pay them and expect them to handle all of the necessary tax payment obligations. The rules are very clear on this; the burden is on you.
- There are exceptions (see Publication 926, which I linked to above), but they are exceptions, meaning that in the vast majority of cases, the rules do apply. If you want to get tricky with this kind of thing, you should speak with a lawyer.
- The paperwork rules are much simpler if you don’t pay any household employee more than $2,000 per year (as of Jan 2016), and you don’t pay all household employees (combined) a total of more than $1,000 in wages in any quarter.
- Paying someone “under the table” is not an acceptable approach! If you want to go this route, I can’t help!
Now that that’s out of the way…
If you don’t have any background in payroll and taxes, it’s hard to understand why hiring someone to work for you (which is a good thing!) results in so many forms to be filled out, payments to be made, and so on. You’d think they’d have made everything easy to comply with. And to some extent they actually have, but… it’s still really complicated. (Why? See the paragraph at the bottom.)
Here is a list of some of that things that you, as a household employer, are responsible for:
- applying for a federal employer ID number and an Oregon business ID number;
- completing the necessary federal and state new employee paperwork, such as the I-9, the W-4, and the Oregon New Hire report;
- withholding payroll taxes (your employee’s contributions to the social security and medicare systems) from your employee’s paycheck;
- paying quarterly estimated taxes (if necessary) to ensure that you do not owe penalties to the IRS for underpayment of payroll taxes;
- providing your household employee with a form W-2 by Jan 31 of each year;
- filing the necessary information returns (generally, forms W-2 and W-3) with the Social Security Administration and the Oregon Department of Revenue (DOR);
- reporting and paying Oregon unemployment taxes to the Oregon DOR (generally via forms OA, 132, and WR);
- filing Schedule H (Household Employers) with your annual income tax return, and paying any additional payroll taxes not covered above; and
- if you qualify, claiming the Child and Dependent Care Credit on your federal income tax return (Form 2441) and any applicable Oregon credits (such as the Working Family Credit) on your Oregon income tax return.
It’s a lot of work, and (understandably!) most people don’t want to do it on their own. The typical arrangement I have with clients who have household employees is as follows:
- I help you obtain the necessary federal and state ID numbers, and answer any questions you or your employee may have about the various tax withholding options (form W-4).
- You pay your employee on a regular basis, using normal checks drawn from your checking account. I provide instructions for calculating (via an online payroll calculator) the necessary tax withholding.
- I provide a spreadsheet to help you track the necessary payroll information. The spreadsheet will keep a running tally of your employer-related tax liabilities, which is helpful if you wish to make estimated (quarterly) federal tax payments.
- You send me your spreadsheet/records in early January, which gives me the information I need to complete all of the necessary payroll-related tax forms (federal forms W-2 and W-3, and Oregon forms OA, 132, and OA).
- (optional) I prepare your Federal and state income tax returns, including Schedule H and any applicable child care credits. You may, of course, choose to do this on your own, or use a different tax preparer.
I generally charge $160 for all of the setup work (sometimes $120, if it’s all very straightforward), and then another $200 each January to file all of the annual payroll forms. It can be more than that if you have multiple employees, or if your situation is unusually complicated for any reason. If you choose to have me prepare your individual income tax returns by April 15, that will be a separate engagement, billed according to the overall complexity of your individual tax situation. Other arrangements are certainly possible, but this takes most of the burden off you and gives you some reassurance that everything that needs to be done is being done.
(If you’re interested in why there’s so much red tape: for the most part, the reason has to do with social security and unemployment compensation. If you do everything correctly, the wages you pay your employee will be eligible social security wages against which your employee can draw social security benefits in the future; and your household employee will be able to collect unemployment benefits when you no longer need them to work for you, assuming they meet all the other qualifications for collecting unemployment. Most of the regulations have to do with making sure neither the employer nor the employee is cheating the social security and unemployment systems.)