At Protea Financial, we understand that for high-net-worth families and individuals, managing a complex household requires a dedicated and professional staff. Whether you employ a nanny, a housekeeper, a private chef, or an estate manager, these individuals are considered household employees under IRS rules.
While their services contribute greatly to your quality of life, their payroll and associated tax filings carry significant legal responsibilities that are distinct from managing business payroll. We’re here to simplify this process, ensuring you maintain impeccable compliance and gain peace of mind.
The Critical Distinction: Why You Are a Household Employer
Many people mistakenly believe they can pay their household staff as independent contractors (using Form 1099). We must emphasize that this is one of the most common and costliest mistakes you can make. The IRS defines a worker as your employee if you control not only the work they do, but how they do it.
For example, if you set the housekeeper’s schedule, provide the cleaning supplies, and direct the order of tasks, that worker is almost certainly your employee. Misclassification is considered tax evasion by the IRS and can result in severe penalties, back taxes, and interest charges.
The Compliance Framework: What You Must File
Once you establish an employer-employee relationship and meet certain wage thresholds, you have mandatory federal and often state payroll obligations.
- The Thresholds for 2025: You generally must pay Social Security and Medicare taxes if you pay any singular household employee via cash wages of $2,800 or more in the calendar year. You must also pay Federal Unemployment Tax (FUTA) if you pay total cash wages of $1,000 or more in any calendar quarter. The state cash wages are $750 or more during any calendar quarter. These thresholds often increase slightly each calendar year.
- Form W-2: Unlike a freelancer who receives a 1099, your household employee must receive a Form W-2, Wage and Tax Statement, by January 31 of the following year. This is required if the wages meet the FICA threshold or if you withheld any federal income tax.
- Schedule H: You must file Schedule H, Household Employment Taxes, with your personal federal income tax return (Form 1040). Schedule H is used to calculate and report the Social Security, Medicare, and FUTA taxes you owe as an employer.
- Tax Payments: These taxes are filed throughout the year, usually quarterly, often through estimated tax payments or increased withholding from your own personal wages. Waiting until the April 15 deadline to handle these taxes is a critical mistake that frequently leads to penalties.
The Burden of In-House Household Payroll
Handling household payroll internally creates an administrative burden that high-net-worth individuals seek to avoid. The process demands meticulous attention to detail and up-to-date knowledge of ever-changing labor laws:
- Calculating Taxes: You are responsible for computing, withholding, and sending the employee’s share of FICA taxes (7.65 percent of the employee’s wages), plus paying your matching employer share (another 7.65 percent) to get to the total 15.3 percent.
- Overtime Compliance: Most household employees are considered non-exempt under the Fair Labor Standards Act (FLSA) and are entitled to overtime pay (1.5 times their regular rate) for hours worked over 40 in a week. Calculating and tracking this overtime accurately is paramount.
- State and Local Requirements: Every state has its own requirements for unemployment tax, new hire reporting, workers’ compensation insurance, and state-specific wage and hour laws, adding layers of complexity that far exceed simple federal compliance. We have a deep understanding of the requirements for California to help keep your payroll compliant.
- Secure Record Keeping: You must maintain meticulous payroll records, including signed employment agreements, I-9 forms, W-4s, and detailed time sheets, for a minimum of three years.
The Protea Financial Solution: Expertise and Peace of Mind
The most efficient way to manage this complexity is through professional outsourcing. Protea Financial specializes in this niche area, providing a comprehensive solution that ensures compliance without draining your personal time.
- Expert Compliance and Classification: We correctly classify your household staff and ensure all calculations for Social Security, Medicare, and FUTA taxes are precise. We navigate state-specific laws regarding minimum wage, overtime, and paid leave.
- Timely and Accurate Payments: We handle the entire payment cycle, including calculating net pay, preparing professional paystubs, and ensuring tax deposits are made correctly and on time to the relevant federal and state agencies, eliminating late payment penalties.
- Full Documentation and Filing: We manage all the required paperwork on your behalf, including:
- Generating employee Forms W-2 at year-end.
- Preparing and filing the quarterly and annual employment tax returns.
- Preparing the final Schedule H for inclusion with your personal income tax return (Form 1040).
- Simplified Financial Management: We keep your household payroll records entirely separate from any business payroll you may have, ensuring IRS compliance and providing you with a clean, defensible audit trail.
- Peace of Mind: By outsourcing to us, you transfer the compliance burden, allowing you to focus on managing your household and enjoying the services of your valued staff, secure in the knowledge that every legal and financial obligation is being handled professionally and accurately.
Don’t let the complexity of household employment taxes jeopardize your financial peace of mind. By partnering with Protea Financial, you gain the expertise needed to manage this obligation seamlessly, ensuring you remain compliant while maintaining your sophisticated lifestyle. Contact Protea Financial today and get a free consultation so you can see how we can help you keep your household employee payroll on track.
