What Are the Tax Responsibilities of Hiring a Household Employee?

Do you have a babysitter come in to your home on a regular basis? Have you hired a driver to run your errands or to bring you to your appointments? Have you brought in a housekeeper, a maid or a nanny?

If so, then it sounds like you have hired a household employee. As such, there are tax implications that govern this employer - employee relationship that you need to be aware of.

By definition, a worker is your employer if you establish and control two elements: If you control what work is done, and control how it is done.

These are the sole factors that the IRS looks at when determining if an individual is a household employee. The amount of hours they work - either full or part time, does not impact this decision. Nor does the rate of pay, whether it be hourly, weekly, daily, or by the job.

If you have brought in a person through an outside placement agency or off of a list as provided by a temp agency, then the person becomes your responsibility once they transition from the temp agency to being under your employment. Once you hire them and if they are no longer required to report back to their agency, they are now your employee.

By definition, the IRS considers the following individuals as your potential household employees:

Babysitters, caretakers, domestic workers, drivers, health aides, housekeepers, house cleaners, nannies, private nurses and yard workers.

If you have contracted out for a specific job to be done, and the worker can control how that job is done and set their own schedule as to exactly when it will be done, they are most likely self-employed and not your employee. If they furnish their own tools, and if they make their services available to other individuals in addition to yourself, again, they are considered self-employed.

If you have hired household employees, then you have assumed the role of an employer, and you need to familiarize yourself with your reporting responsibilities.

According to the IRS, you will need to furnish your employee a W-2 if the individual has earned more than $1,700 in the taxable calendar year. This is reflective of 2010 figures; the amount may change year to year. If you file one or more W-2s, you also need to file a W-3, which acts as a summary sheet.

If you are required to provide a W-2 then you also are required to file a Schedule-H along with your 1040 tax return. Schedule H functions much like a Form 941 for a business - It is used to report the employment taxes that you have withheld for your employees.

In order to file a Schedule-H, you will need to apply for an Employer's Identification Number (EIN). If you do not have an EIN, you will need to request one by using Form SS-4, Application for Employer Identification Number. An EIN can be granted immediately over the internet or by telephone, and there is no charge to obtain one.

For more information, review the Instructions for Schedule-H specific to the tax year you are filing.

More from this Contributor:

Does the IRS consider you an employee or an Independent Contractor?

Can I deduct my job search expenses?

Understanding your small business tax write-offs