Payroll Tax Rates and Forms

If you are required to pay employment taxes on domestic help, you can pay them along with your regular income tax on Form 1040. However, you will need to complete Schedule H, Household Employment Taxes, and attach it to your tax return. You can call 1-800-TAX-FORM or go to the IRS website to get a copy of this form and its instructions, which will walk you through the procedures for completing the form. Also ask for a copy of IRS Publication 926, Household Employer's Tax Guide, which explains more about the responsibilities of employers, including the need to file annual W-2 forms for each employee.

Planning Tools You can download Schedule H to aid in your financial planning.

If you are required to pay payroll taxes on your employee's paycheck, the FICA tax rate that you'll pay is 7.65 percent of the employee's paycheck, and you should withhold an equal amount (7.65 percent of pay) from the amount you give your employee. FICA taxes include Social Security and Medicare. You may choose to pay your employee's portion of the tax, if you wish.

Work Smart For 2011, the employee-share of the OASDI portion of Social Security Taxes is reduced from 6.2 percent to 4.2 percent for wages earned during the year, up to the taxable wage base of $106,800. (No OASDI is due on amounts over $106,800.) The employer-share of the OASDI tax remains at 6.2 percent. In addition, there is no reduction in the Medicare (HI) portion of Social Security taxes, which is 2.9 percent: 1.45 percent for the employee-share, and 1.45 percent for the employer-share.

You will also have to pay federal unemployment taxes. Because the FUTA tax rate changed during 2011, you must apply different rates to wages earning in the first half of the year and to those earned in the second half. Multiply the portion of the wages that you paid before July 1 by .008. Multiply the amount page paid after June 30 by .006. Be sure to check with your state department of labor for the rules on state unemployment tax, since you will generally have to pay that tax as well.

You don't have to withhold income tax from your household employee's paycheck unless you want to.

As mentioned above, you can report all the employment taxes you owe for domestic workers during 2011 on your 2011 tax return. However, you may have to pay an estimated tax penalty if your total tax bill, including taxes on household workers, is over $1,000 more than the tax you prepaid throughout the year through estimated tax payments or payroll withholding.

To avoid this penalty, it's generally necessary to estimate the household taxes you'll be liable for during the year, and use your estimate to increase the withholding amount on any paychecks you receive, or add the amount to your quarterly estimated tax payments during the year.