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It is tax season once again and you are getting ready to file or have your accountant prepare your personal return.
If you employed a household worker last year – like a nanny, housekeeper, or senior caregiver – you may be wondering … what is Schedule H, and do I need to file it?
What is Schedule H?
Schedule H is where you report household employment taxes to the IRS and is filed with your personal tax return.
If you paid cash wages to a household employee and the wages were subject to Social Security, Medicare, and/or unemployment taxes, or if you withheld federal income tax, then you likely need to file Schedule H. The threshold for reporting FICA (Social Security and Medicare) taxes was $2,300 in 2021. Do not count wages you paid to your spouse, children under age 21, parent, or any employee under the age of 18 at any time in 2021.
Unemployment taxes need to be paid on wages of $1,000 or more in any calendar quarter. Do not count cash wages paid to your spouse, children under age 21, or a parent.
While you are not required to withhold federal income tax from a household employee’s wages, it is recommended that you do so your employee is not stuck with their entire income tax obligation when they file their own return.
Filing Schedule H for 2021 taxes
There is an additional wrinkle when filing your 2021 tax return if you provided pandemic-related paid leave to your employee last year. You may receive a dollar-for-dollar tax credit on Social Security taxes for any paid leave you gave to your employee for qualified reasons due to the pandemic including getting vaccinated and recovering from its side effects. It was optional to provide this leave through September 30, 2021. Schedule H will reconcile these paid leave provisions.
Before completing Schedule H
Before you start filling out Schedule H, make sure you have all the information you need including:
Employer Identification Number (EIN)
Total wages paid to your household employees
Federal income tax withheld
State unemployment contributions
Qualified sick and family leave wages paid to an employee
Employer’s share of Social Security taxes on that qualified paid leave
Refundable and non-refundable portions of the employer tax credit for paid leave
You will need to know sick leave paid before April 1, 2021, and after March 31, 2021.
Completing Schedule H
Schedule H asks a series of questions to determine whether you are subject to household employment taxes. If you are, you’ll enter your employee’s wages and calculate what is owed in Social Security and Medicare taxes.
Complete the top section, which asks for your name, Social Security Number, and Employer Identification Number. Then answer questions A, B, and C and follow the instructions. Basically, these questions determine whether you need to complete the paid sick leave portion of Part 1. If you only withheld federal income tax and/or contributed unemployment taxes, you do not qualify for the paid leave tax credit as you did not pay Social Security taxes.
Part I of Schedule H
This section details cash wages paid to your employee as well as Social Security, Medicare taxes, and federal income taxes. You will also calculate your tax credit for paid leave in this section of Schedule H.
FICA (Social Security and Medicare) taxes are 15.3 percent of cash wages. Both you and your employee contribute 7.65 percent. This breaks down to 6.2 percent for Social Security and 1.45 percent for Medicare.
Part II of Schedule H
Here you will indicate your federal and state unemployment tax contributions.
FUTA is six percent on the first $7,000 of cash wages. This is paid by the employer only.
SUI taxes vary by state and are also paid by the employer. However, employees in three states (Alaska, New Jersey, and Pennsylvania) are subject to state unemployment tax withholding. You will withhold this tax from your employee’s wages and remit it to the state.
If you pay SUI, you may be able to reduce the amount you owe for FUTA. Your credit will be determined when you complete Schedule H.
Part III of Schedule H
This is where you total your household employment tax obligation after taking the paid leave tax credit.
Once you’ve made those calculations, you will enter the total amount of household employment taxes owed from Schedule H, line 26 on Schedule 2 (PDF), line 9. This will also be added to Form 1040 (or Form 1040-SR), line 23. If you remitted household employment taxes quarterly using Form 1040-ES, you can enter those payments on Form 1040 (or Form 1040-SR), line 26.
Remember, if a payroll service is remitting taxes on your behalf each quarter, you’ll count those as estimated tax payments.
If you have tax credits owed to you for pandemic-related paid leave, include those amounts, on Schedule 3 (PDF).
Once you have finished Schedule H, you will file it with your personal tax return (Form 1040 or Form 140-SR).
Keeping Schedule H after filing
You should keep copies of Schedule H for at least four years from the filing due date. You will also want to keep pay records including pay dates, wage amounts (cash and non-cash), FICA taxes withheld, and federal income taxes withheld (if any).
Failing to file Schedule H
If you’re required to file Schedule H and fail to do so, you will likely:
Receive notices from the IRS and/or Social Security Administration
Face financial penalties
Need to amend your personal tax return
Pandemic-related paid leave for household employees
For certain circumstances related to COVID-19, household employees were eligible for
Up to two weeks of sick leave (full pay for self, 2/3 pay for family care) for illness, quarantine, or school closures
Up to 12 weeks of Family and Medical Leave Act (FMLA) leave for school closures (10 days unpaid and then up to 10 weeks at 2/3 pay)
Tax credit for household employers
To help cover the costs of paid leave, household employers can receive a dollar-for-dollar tax credit for providing qualified, pandemic-related leave to their employees.
Paying nanny taxes quarterly
It is a good idea to withhold taxes from your employee each pay period and remit both the employer and employee tax amount each quarter with Form 1040-ES. That way you and your employee are not stuck with your entire tax obligation when you file your personal returns.
Also, since household employment taxes are added to your personal tax obligation, you may have to pay an estimated tax underpayment penalty if you don’t pay your household employment taxes during the year. Another option is to have additional federal income tax withheld from your wages during the year.
Reposted with a permission from GTM (www.gtm.com)