Pack lunch for the kids. Help dad board the bus to dementia day care. Pick up grandma’s prescription. Prep for the 9 a.m. conference call.
It’s just another hustle-bustle morning for a member of the sandwich generation—individuals who nurture their children and care for aging or disabled family members.
More than 1 in 5 adults—53 million adult Americans—are unpaid family caregivers1. From dispensing medication to coordinating activities for daily living to dishing post-soccer game treats, family caregivers devote the equivalent of an unpaid part-time job to their labor of love.
Read on for key takeaways on:
Home Health Aide to the Rescue
The majority (67%) of family caregivers face the daunting challenge of balancing their jobs with their caregiving responsibilities2. Americans say accepting that challenge has made their own health worse3.
As a result, many families opt to supplement their caregiving with a home health or personal care aide, a profession projected to grow 21 percent from 2023 to 2033, much faster than the average for all occupations4.
Hiring an in-home caregiver can help bring relief. A skilled aide helps seniors, wounded veterans, people with disabilities or chronic illnesses with activities of daily living, plus monitors their health.
That relief can also mean taking on tax and payroll responsibilities as a household employer.
Household employees can include home health aides, nannies, babysitters, housekeepers, maids, butlers, home chefs, gardeners, and others who perform household work for you in or around your private residence.
What is a Household Employer?
According to the IRS, household workers are your employees if you can control the work they do and how they do it.
For instance, you’ve brought in a home health aide to help care for your mom with dementia. You’ve established the aide’s work hours, outlined a set of responsibilities, and defined how you’d like the aide to support the household and care for your loved one. You’ve clearly established control of the work and how the work is done.
A household employee differs from an independent contractor, who sets their work hours, completes the job on their terms, brings their own equipment and resources, takes vacation and time off at their discretion, and may send a substitute in their place if they’re busy with another family. A household worker also differs from a caregiver employed by an agency or company.
As a household employer, you are responsible for paying payroll and payroll taxes, something commonly referred to as the nanny tax.
What is the Nanny Tax?
The nanny tax is a federal tax paid by household employers. It’s illegal to pay a household worker under the table, or without making the required tax deductions. As a household employer, you may be required to withhold taxes from your household employees.
If you pay your home health aide more than $2,700 ($2,800 in 2025) in cash wages during the tax year, you must withhold Social Security and Medicare taxes (FICA payroll tax), plus possibly pay state and local taxes depending on where you live5.
The current withholding rate for the employee's portion of Social Security tax is 6.2% and 1.45% for Medicare, for a total rate of 7.65%. In addition, household employers must pay an additional 7.65% FICA tax out of their own pocket. The total tax rate is 15.3%.
If you pay your household employee total cash wages of $1,000 or more (but less than $7,000 per year) in any calendar quarter of 2023 or 2024, you must also pay the FUTA tax (Federal Unemployment Tax Act) of 6% of cash wages. You may also owe state unemployment tax. Household employers should keep handy a copy of the IRS Household Employer’s Tax Guide.
A payroll service like SurePayroll® By Paychex can help simplify the complex process of household employee payroll and tax management.
6 Risks of Paying Your Caregiver Under the Table
Paying your household employee in cash is legal, but it’s unlikely to make your life easier.
Here are 6 risks to paying your household employee under the table, or paying an employee cash without making the required legal deductions.
Risk 1: IRS Penalties & Fines
Getting caught paying your household employee under the table could trigger an IRS audit—a time-consuming, intrusive and frustrating process—that could lead to penalties, fines and possible legal action.
You could face failure-to-pay and failure-to-file penalties that could total up to 50% of your unpaid taxes, plus back wages if you did not meet minimum wage and overtime requirements.
Risk 2: Accounting, Bookkeeping and Possible Errors
Manually tracking hours worked, cash payments, taxes and more requires steadfast attention to detail—far more time than many household employers anticipate. Even a small error can multiply, causing considerable problems along the way.
Risk 3: Lost Dependent Care FSA Savings
Families can save up to 30% on qualified out-of-pocket dependent care services by paying their household employee properly, thanks in part to the Dependent Care FSA.
The pre-tax dollars you contribute to a Dependent Care FSA are not subject to payroll taxes, so you end up paying less in taxes and taking home more of your paycheck. Contribution maximums for eligible participants range from $2,500 per year for married couples filing separate tax returns to $5,000 per year for married couples filing a joint tax return or for those who file as a single head of household.
Risk 4: Missing W-2
Your household employee must receive a W-2 by January 31. If they don’t, they can contact the IRS, provide their dates of employment, your contact information and an estimate for wages earned. The next time you open your mailbox, you could find an IRS notice, alerting you about back taxes and potential penalties.
Risk 5: Workers’ Compensation Penalties
Many states require workers’ compensation coverage for household employees depending on the number of hours worked, pay rate and other compensation factors.
Any work-related injury or illness suffered by a household employee could result in a workers’ compensation claim. Failure to provide workers compensation coverage when required could result in penalties and fines, and possibly lead to a criminal conviction in some states.
Risk 6: State-Mandated 401(k) Retirement Plans
Multiple states mandate that small business owners provide employees with a retirement savings option or face potential penalties. Learn more if your state requires you to provide a 401(k)-retirement plan to your household employee.
7 Advantages of Being on Payroll
While it may be tempting to accept under the table cash payments from your household employer, resist the urge. Here’s 7 reasons why.
Reason 1: Proof of Payment
A paycheck stub serves as a record of payment for services provided. It can also serve as documentation in the event of a dispute with your household employer.
Reason 2: It Complicates Withholding Payments
You’re required by law to pay federal taxes, and possibly state and local taxes, on earnings. If your household employer pays you in cash, you’re responsible for reporting wages and payments on your federal and state income tax documents.
Cash payment also means you have to pay the required percentage of your Social Security and Medicare (FICA) taxes. The current withholding rate for the employee's portion of Social Security tax is 6.2% and 1.45% for Medicare, for a total rate of 7.65%. You also must remit quarterly tax payments based on your federal and state obligations.
Reason 3: It Puts You at Risk
It’s illegal to not report wages and payments on your federal and state income tax documents.
That means you could face fines and criminal charges if the IRS audits either you or your employer for not meeting your tax obligations. Plus, if your employer misclassifies you as an independent contractor, they must pay the employer portion of FICA and FUTA / SUTA taxes.
Reason 4: Ineligible for Unemployment Benefits
If your household employer didn’t pay FUTA taxes on your wages, those wages won’t be considered towards your eligibility for unemployment benefits if you’re laid off from that position.
Reason 5: Missing Social Security Credits
Come retirement, you’ll be short employment credits with the Social Security Administration since you haven’t paid into the pool. This non-payment also impacts your Medicare retirement benefits.
Reason 6: Incomplete Income History
You’ll have a gap in your income history which could hurt you when applying for a mortgage, auto loan, or other major credit-based purchase.
Reason 7: Missing Employment Benefits
If you’re classified as an independent contractor instead of an employee, it’s possible that you’ll miss out on standard employment benefits like a 401(k)-retirement plan, paid time off, or subsidized health insurance.
Celebrating Family Caregivers
Caregiving is a delicate balancing act. The demands of work outside the home only increase the challenges. Join SurePayroll as we celebrate family caregivers year-round, and especially during National Family Caregivers Month every November.
SurePayroll helps you care for the people who support your household. Our payroll services calculate and pay the necessary taxes and files the appropriate deductions for Social Security, Medicare, unemployment, and state taxes.
SurePayroll can also produce multiple 1040-ES filings on behalf of the household employer and provide a signature-ready Schedule H to attach to your annual 1040 filing.
1 https://www.caregiving.org/research/caregiving-in-the-us/caregiving-in-the-us-2020/
