Your Tax Terms Glossary: A Household Employer's and Employee's Guide
Are you a nanny, senior caregiver, housekeeper, etc.? Do you employ one? Here's a list of all the tax forms and terminology you need to know.
When you hire someone like a nanny or senior caregiver and pay them more than $1,900 in a calendar year, they become your employee and you become a household employer. And you're responsible for paying the Social Security and Medicare taxes (FICA) for your employees -- usually called the nanny tax. Congratulations!
At Care.com, we know that taxes can be scary and intimidating. There are forms you have to file when you are either an employee or employer, and it can get confusing. Who fills out the W-4? What is a FEIN? What is the Schedule H for?
We've put together a Tax Terms Glossary to streamline the process for you. Keep it handy when filing your quarterly taxes.
Note: Federal forms are available on the IRS website, and state forms are available on your state's official website.
Adjusted Gross Income: The adjusted gross income is the amount of your total (gross) income, minus any deductions (adjustments) you claim on your tax return.
Child or Dependent Care Tax Credit: This tax credit provides tax relief to families who have care-related expenses while they work or earn a degree. The expenses are capped at $3,000 per child per year, with a maximum of $6,000 per family per year.
Child Tax Credit: The child tax credit is given for households earning less than $130,000 that have qualifying, dependent children (according to age or disability).
Dependents: A dependent can be a child, a family member or even someone not related to you, for whom you provide financial support and claim as a deduction on your taxes.
Earned Income Credit: This is a refundable tax credit given to those who qualify -- generally those in a lower tax bracket with qualifying children.
Estimated Tax: Estimated taxes are paid on a quarterly basis (state and federal calendar quarters differ) and are generally one quarter of the total year's tax withheld from a employee's paycheck and an employer's matching contributions.
Exemptions: A portion of an individual or business entity's income that is not taxable.
Federal Employer Identification Number (FEIN): Also known as the 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. Apply for an EIN online.
Federal Insurance Contribution Act (FICA): These are taxes paid by both the employer and the employee to fund the federally-sponsored and run Social Security and Medicare programs.
Federal Unemployment Tax Act (FUTA): A tax paid by employers to help fund state workforce agencies.
Filing Status: Your filing status is indicated on your individual income tax return as single, married filing jointly, married filing separately, head of household or qualifying widow or widower with dependent child.
Form 1040: U. S. Individual Tax Income Tax Return. This form is for personal federal income tax reporting with the IRS.
Form 1040-ES: This is an estimated tax form used for household employers who need to pay federal estimated quarterly tax payments. It's filed within a month of each quarter ending throughout the year. (Don't confuse the 1040ES with the 1040EZ, which is a shorter version of the 1040.)
Form 1099: Form 1099 reports income other than wages, salaries and tips (for which there is the W-2). This form is generally used by an independent contractor to whom you have paid at least $600. Nannies and senior care employees need to fill out a W-2, as they are considered employees, not independent contractors. Read why in our article about What's Wrong with Hiring My Nanny as an Independent Contractor? »
Form I-9: The U.S. Citizenship and Immigration Service's I-9 is an Employment Eligibility Verification form that shows your employee is legally able to work in the United States. Keep a copy of this form with your records. It doesn't have to be submitted, but must be available for review if requested.
Form SS-5: This is an application for a Social Security card. If a potential employee doesn't have a Social Security number, or has a card with an incorrect name, they can apply for one using Form SS-5, which can be obtained through the Social Security Administration office.
Form W-2: Wage and Tax Statement. Employers distribute this form to their employees to report wages and any taxes (including Social Security and Medicare) withheld from them. These forms are sent to employees by January 31.
Form W-2 Copy 1: Employers use Copy 1 of Form W-2 to report an employee's wages and taxes withheld to state or local tax agencies.
Form W-2 Copy 2: Employees file Copy 2 of Form W-2 with their state income tax return.
Form W-2 Copy A: This is a tax form used to summarize all wages earned and taxes paid by an employee throughout a calendar year. Employers send this form to the Social Security Administration.
Form W-2 Copy B: Employees should attach Copy B of Form W-2 to their individual 1040.
Form W-2 Copy C: Copy C of Form W-2 should be stored by employees for their own reference.
Form W-3: This is a tax form sent to the Social Security Administration by an employer to summarize the total earnings, Social Security wages, Medicare wages and other withholdings for all their employees.
Form W-4: Employee's Withholding Allowance Statement. This form is filled out by an employee, so the employer can determine how much tax to withhold. Learn more about W-4 Forms for Nannies and Caregivers.
Household Employee: Domestic workers, such as nannies, senior caregivers, home health aides, chefs, housekeepers, personal assistants, etc., that perform duties in or around the home.
Medicare: Medicare ensures access to health care for those 65 years of age and older. This federal program is funded by taxes.
Quarterly Taxes: These are taxes, often estimated, that are paid at the end of each federal and state calendar quarter (the dates can differ). These taxes include unemployment taxes, income taxes and Social Security and Medicare taxes.
Schedule H: This form is used for reporting household employment taxes and is submitted with the 1040. It reports any taxes you owe for employing household help like nannies, cooks or housekeepers.
Schedules: Schedules are attachments to an individual tax return used to report certain types of income or deductions.
Social Security: A federally-sponsored program that offers retirement benefits to older Americans. Workers pay into this program through taxes withheld from their paychecks.
Underpayment Penalty: An underpayment penalty can be assessed by the IRS to employers that don't pay enough tax throughout the year by withholding or making estimated tax payments.
Withholding: This represents the portion of your employee's income that will be paid as her income tax, Social Security tax and Medicare contribution. The amount is determined by how many allowances she claims on her W-4.
Check out Care.com's Nanny Tax Timeline for advice on what to do when or look into Care.com HomePay, managed by Breedlove, a household employment payroll service that can file all the "nanny taxes" for you, or help you out each step of the way.
Julia Quinn-Szcesuil is an award-winning freelance writer and a mom to two girls. She lives in Massachusetts and has written for local and national publications.
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* The tax information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional tax advisor who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.
For more tips and advice, check out these Nanny Tax Articles.