If your high-net-worth client will pay a household worker at least $2,100 in 2018, your client must withhold and remit Social Security taxes of 6.2 percent of Social Security and 1.45 percent of Medicare taxes from all cash wages.
Your HNW client must also pay his or her share of Social Security and Medicare taxes, also 7.65 percent.
Household employees include housekeepers, maids, babysitters, gardeners and others who work in or around a private residence as an employee. Repairmen, plumbers, contractors and other businesspeople who provide their services as independent contractors are not your client’s employees and are responsible for their own taxes.
“That’s the general [employee] rule, with some exceptions for spouses, students, parents and minors,” said Alyzabeth Smith, a senior accountant with Wipfli CPAs and Consultants in Media, Pa. The IRS has guidelines on distinguishing employees from independent contractors—and the wrong classification could result in back taxes owed, she added.
Do most wealthy clients understand that there are tax laws regarding domestic help? “Likely a third [of clients] is my guess,” said Daniel Morris, a CPA and senior partner at Morris + D’Angelo CPAs in San Jose, Calif. “We ask about household help; most of our clients affirmatively state they do not have them. Smart people comply, begrudgingly but willingly.”
“It’s not only the extra taxes people want to avoid, it’s the extra paperwork,” said Susan Carlisle, a CPA at Carlisle Dorafshani Wohl and Associates in Los Angeles. “Employers need to get an employer ID number with the IRS and the state. Then they need to complete annual or quarterly tax forms and W-2s and W-3s, as well as state employment tax forms.
“It’s often more bother than anyone wants to do for a small amount, such as $200 a week for a cleaning lady,” Carlisle added. “However, with limited new immigrants available, [household help] for HNW families has become costly—$1,000 per week and up.”
“There are also state and federal unemployment taxes,” added John Lieberman, a CPA at Perelson Weiner in New York.
Potential consequences for HNW clients who don’t comply can include, although rare, criminal penalties, said Rob Seltzer, a CPA with Seltzer Business Management in Los Angeles. The household employee tax form is a Schedule H on an individual tax return, so tinkering—or omitting—numbers could lead to tax fraud charges. Both the employee and the HNW client could face late-payment penalties, and not reporting the wages will short the employee on their Social Security payments when they are older.
“By not filing, the household employee has no way of verifying income if they need to get a loan,” Seltzer said. “They could also lose out on the earned income tax credit.”