We know taxes can be intimidating for both families hiring caregivers and caregivers working in a family’s home. To help you better understand this topic, we compiled a list of the tax terminology you need to know. Bookmark this page so you can refer to it any time you’re unsure about a form or a tax term that you’re reading about.
Child or Dependent Care Tax Credit: A tax credit for families who have care-related expenses while they work or earn a degree. The expenses are capped at $3,000 per dependent per year, with a maximum of $6,000 per family per year. Most families will receive a 20 percent tax credit on these expenses.
Dependent Care Account: A type of flexible spending account (FSA) that allows families to pay for up to $5,000 of care-related expenses per year tax-free. Many companies offer this FSA as part of their employee benefits package.
Estimated Taxes: Federal taxes sent to the IRS up to four times per year. Families with household employees typically send the taxes withheld from their employee’s paycheck and their matching employer taxes, as well as federal unemployment insurance taxes.
Exempt Employee: An employee defined by the Fair Labor Standards Act (FLSA) as being exempt from minimum wage and overtime requirements. These are usually executives, administrators and highly compensated office employees with advanced knowledge of their field.
Experience Rating: An employer’s unemployment insurance tax rate, which may be increased or decreased each year depending upon the amount of unemployment benefits paid out to former employees.
Fair Labor Standards Act (FLSA): A comprehensive federal law that is the principal source of federal wage and hour regulation of most employers.
Federal Employer Identification Number (FEIN): Also known as an EIN (Employer Identification Number). It’s a unique nine-digit identification number assigned to a business entity so the IRS can identify it on all tax filings.
Federal Insurance Contribution Act (FICA): Taxes paid by the employer and withheld from their employee to fund the federal Social Security and Medicare programs.
Federal Unemployment Insurance Tax (FUTA): A federal tax imposed on employers to create a federal fund that provides financial backup to all of the state unemployment insurance pools. The FUTA rate is 6.0% on the first $7,000 in wages, but the rate is dropped to 0.6% when an employer’s state unemployment taxes have been paid in full on a timely basis.
Gross Wages: An employee’s wages before taxes are withheld.
Household Employee: A person who is paid wages to perform domestic services within a residence. Examples include nannies, babysitters, senior care providers and personal assistants.
Household Employer: A person who pays a household employee to perform duties in or around his or her home.
Independent Contractor: A worker hired to perform a service that controls their own employment circumstances, including when and how work is done. Independent contractors are not considered household employees.
Individual Taxpayer Identification Number (ITIN): A number assigned by the IRS to taxpayers that do not qualify for a Social Security number. An ITIN is temporary and is used by the IRS for identification and tax payment purposes.
Internal Revenue Service (IRS): The federal government agency responsible for the collection of employment and individual income taxes and enforcing the tax code.
Live-In Employee: An employee that resides in the household where they are employed or works and sleeps at least 120 hours per week in their employer’s home.
Live-In Overtime Exemption: A federal law that exempts live-in employees from federal weekly overtime requirements.
Net Pay: The amount paid to an employee after all taxes are withheld. Also referred to as “take-home pay” because it’s the amount an employee receives in their paycheck each pay period.
Non-Exempt Employee: An employee who must be paid at least minimum wage for the first 40 hours of a pay period and overtime for all additional hours worked during the week.
Overtime Pay: One-and-a-half times the standard hourly pay rate paid to a non-exempt employee for all hours over 40 in a seven-day work week. Also referred to as “time-and-a-half.”
Publication 926: The IRS publication that provides explanations and instructions to specific tax and payroll issues governing household employers.
State Unemployment Insurance Tax (SUTA): A state tax imposed on employers to fund the unemployment insurance pool.
Taxable Wage Limit: The maximum amount of an employee’s wages that certain taxes apply to in a calendar year.
Threshold: The level of wages above which employers must report wages and remit taxes.
Workers’ Compensation Insurance: An insurance policy that pays benefits to workers who are hurt on the job.
Form 1040-ES: The federal form families use to make estimated tax payments to the IRS throughout the year.
Form 1099: A form generally used by an independent contractor to whom you have paid at least $600 during the year. Household employees are not considered independent contractors.
Form 2441: A tax form used to declare child and/or dependent care expenses incurred by a family for the purpose of taking a tax credit. Form 2441 is attached to Form 1040.
Form I-9: A form issued to newly hired employees to verify their identity and authorization to work in the United States. Employers are not required to file Form I-9, but must keep it in their records for three years, or one year after their employee leaves or is fired, whichever date is longer.
Form W-2: A tax form used to report an employee’s annual wages and the amount of taxes withheld from his or her paycheck.
Form W-2 Copy 1: A tax form used to report an employee’s wages and the taxes withheld by his or her employer to the state, city or local tax agency.
Form W-2 Copy D: A copy of Form W-2 which an employee keeps for their records.
Form W-2 Copy A: The tax form used by employers to summarize wages earned and taxes remitted on behalf of an individual employee throughout the calendar year. Employers send this form to the Social Security Administration.
Form W-3: A tax form used by employers to summarize wages earned and taxes remitted on behalf of all employees combined throughout the calendar year. Employers send this form to the Social Security Administration.
Form W-4: A form given to an employer by their employee used to determine the correct amount of federal income taxes to withhold from the employee’s wages.
Schedule H: A supplement to Form 1040 used to report household employment activity to the IRS. Anyone who hired a household employee during the year must attach a Schedule H with their personal federal income tax return.