[Editor’s Note: My daughter Whitney is a paid columnist here at WCI. She did her own taxes this year, and was bummed to be hit by a $110 tax bill. I woke her up on the morning (at 11 am) this was written with good news and bad news. The bad news was that she would need to file a 1040X. The good news was that she overpaid her taxes. She explains why in the post below and also how to fix your own tax mistakes. As usual with posts by Whitney, you are expected to be extraordinarily polite in the comments section.]
It turns out I made a mistake. Someone commented on my previous post that my 2016 babysitting money ($775) isn't self-employment income, it's household employee income. Which means I didn't actually owe that $110 in payroll taxes I paid. And since $110 is a lot of money to me, it was worth filing a 1040X to get it back. This post is going to discuss the household employee rules, both for the employee and your likely situation- the employer. It is also going to talk about filing a 1040X (the form you use to correct mistakes on your tax return.)
Household Employee Tax Rules
I am a household employee because I babysit at other people’s houses and not my own. While I’m in their house they can dictate what is to be done and how I do it, which means I am employed by them.
What is a household employee?
A household employee is someone you hire to do household work who isn't running a business doing that work. I know that's a little gray, and it's a little like the W-2 vs 1099 question for doctors. Basically, if you can dictate what they do and how they do it and provide all the tools for the job, they're your employee. Some examples might help.
If you drop your kids off at someone else's house, they're not your household employee. If you hire the neighbor girl to watch your kids at your home every Friday night and you provide the pizza, she is your household employee.
The teenager next door comes over each Saturday morning and mows your lawn. He uses your mower and your gas and you give him $20. He's a house hold employee. But if you hire Rex's Lawn Care and Rex has three trucks and 12 employees, has his own website and brings his own lawnmower, Rex is self-employed.
There is obviously some gray in between these examples. When something is gray, call it in your favor. But in my case, it isn't gray at all. I'm a household employee of several different households.
Withholding Taxes and Issuing W-2s
Here's your biggest worry. If you pay any one household employee more than $2,000 in a year, you have to pay the employer half of their Social Security and Medicare taxes and withhold the employee half. And you have to issue them a W-2. If you pay more than $1,000 to all of your employees in any given quarter, you also have to pay federal unemployment tax. You pay all these taxes using Schedule H.
Most child employees do have to pay Social Security tax, but there are three exceptions– if you work in the family business, if you are a household employee, or if you deliver newspapers.
Your household employees may ask you to withhold their income tax, and you can withhold it from them if you want to, but you don’t have to. The best resource to learn more if you use a nanny or something is Publication 926. Here's the quick version.
Before 1994, you had to withhold taxes on anyone you paid more than $50 a quarter to, so there were tons of people violating the law just hiring babysitters. Congress changed the law to make it a little more reasonable, $1,000 a year. That has been increased over time to $2,000.
The Dependent Care Credit
If you paid a babysitter, summer camp, day care, or other care provider to take care of your child under 13, or a disabled dependent of any age, you may qualify for a tax credit of up to 35% (only 20% for most docs) of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents. However, there are some qualifications:
First, you must have made money for the tax year.
Second, you must be the parent or main caretaker of the child or dependent.
Third, the care service must have been used to work or look for employment, not just a date or a vacation.
Fourth, the childcare provider cannot be your spouse, dependent, or the child’s parent. So basically my dad couldn’t pay me to watch my siblings while he works and get a tax credit. You take this credit on line 49 of the 1040 using Form 2441.
The Employee Perspective
As a household employee, you can make up to $2,000 per employer before you owe any payroll taxes. That means a really hard-working kid could have four different household employers, earn $1500 from each, and still not owe any payroll or income taxes.
That kid, of course, won't get any credit with Social Security. Generally, you get one quarter's worth of credit for each $1300 you earn and pay Social Security taxes on. But if you're a household employee, you only get credit if you earn at least $2,000 from a single employer.
Filing my 1040X
My dad and I discovered that it was infinitely easier to do the 1040X by hand instead of doing it on TurboTax (what we used to originally do my taxes.) Basically, you use your 1040 and transcribe what isn’t changing then make any new changes.
So mine looked like this.
You also have to give a quick explanation of what you screwed up. Here is mine.
Then you put the 1040X in an envelope with any schedules that had to be changed (none in my case.) Pretty easy. Only took us about 5 minutes. That's a lot better hourly rate than what I got paid to write this post. A few weeks later I got a check in the mail for $111.96 ($110 + interest.)
What do you think? Do you have household employees? Has it been easy for you to do a Schedule H each year? Have you ever had to file a 1040X? What was that like? Comment below!