Withheld FICA and Medicare for babysitter, didn't have to

You definitely need to refund the withheld amount since that must be done by the employer. I'd issue the W-2, showing zero SS and Medicare wages.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Am I _required_ to issue a W-2 if in the end no taxes were withheld?

If not, and if our babysitter doesn't want us to issue one (not sure why she would), I'd frankly rather avoid the hassle. It's hard enough jumping through all the silly hoops that are required to "do the right thing" with household employees; if there's a hoop I can dispense with, I'm all for it.

Thanks,

jik

Yes, you must file a W-2 to every employee to whom you paid $600 or more.

R's, John

My wife got two W2's from last year for jobs at which she earned less than $1,700.

In both cases FICA and Medicare were withheld.

Based on your assertion, "You definitely need to refund the withheld amount..." we asked them to do so.

Both employers said they've never heard of such a thing despite issuing many W2's in the past for less than $1,700 in wages.

Are you basing your answer on some difference you're aware of between household employers and normal employers?

Or are they wrong?

Or are you wrong? :-)

All the language I've seen everywhere I've looked has said that the employer _must_ withhold for employees who make more than $1,700 in wages. I've not found any language which says that the employer must _not_ withhold for employees who make less. So I can't find any support for your claim that I have to refund the withholding.

If I'm not obligated to refund the withholding, then that begs a different question... what happens to it? Because if I follow the instructions on Schedule H literally, then I don't have to pay it to the IRS despite the fact that I withheld it. And that definitely seems wrong. Is this a "bug" in Schedule H?

Did you file form 941, 944 and such forms with the IRS to report and deposit quarterly payroll and federal income tax payments?

Yes. It all goes back to 1993 and "Nannygate." Before then household workers' wages were treated just like everybody else's--taxable from dollar one. When Congress "fixed" it they threw the household workers under the bus and made wages below the threshold paid by one employer exempt from SS/Medicare. The impact on the employer is obvious, but the impact on the worker is less so. They didn't want to talk about it, but if your wife checks her SS earnings statement she'll find that she didn't get any credit for those wages.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

If you withheld it, you must pay it in. 26 U.S.C. 7202:

"7202. Willful failure to collect or pay over tax.

"Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution."

Your only other choice is to seek a refund for a tax paid in error. Use IRS Form 843.

As I'm sure others have noted, for an individual employing household help, no such federal returns are required.

My belief is that you follow path (a).

Since you withheld Social Security and Medicare taxes, I believe you should report and remit them on Schedule H and provide a W-2 to the babysitter.

I haven't looked at the Schedule H instructions in a long time, and they weren't the model of clarity then, but I seem to recall the withholding obligation triggered by either actual payments exceeding $1700 or payments reasonably expected to exceed $1700 for the year.

You should send the money to the babysitter so that they can pay the FICA tax. I mean you were just putting this money into a separate account of your own (as forms 941 and such are not required), so you could as well send it to her. Either way the IRS gets their ounce of blood -- either you pay it or the babysitter pays it.

I think you unnecessarily scare here. This section refers to refusal to collect FICA and other taxes -- i.e. to not perform withholding. But if you withheld taxes when you were not supposed to, then this section does not apply.

I think (b) is better. In this case the withheld money was put into the taxpayer's own account so that they could have the money at the end of the year when they file Schedule H. It's not like they deposited the money with the IRS through form 941 and such, so they could just send the money to the babysitter.

Generally it makes no difference but (b) may result in less tax. Suppose the babysitter has a second Schedule C job that resulted in a loss of about $1300. Then the net gain from self-employment is

1700-1300@0 and no social security tax at all is due (it is only due if you make more than $450 or so). Also if the babysitter files a Schedule C they can deduct medical insurance premiums. But with the Schedule H approach I'm not sure they can do this.

To be clear, my wife is not a household employee. She runs her own storytelling business, and two of her clients insisted that they could not pay her as a contractor for the few events she did for them per year; according to them, she just *had* to let them put her onto their payroll and send her a W2.

Of course, this means that they pay part of the FICA and Medicare, so I suppose I shouldn't complain. But the amounts are so small that I really would have rather had everything be simple and not have to deal with a mixture of self-employment income and W2's from multiple "employers". Ugh.

Having said all of that, are you saying that when Congress "fixed" the tax code after Nannygate, they decreed that any time *any* employer, not just a household employer, withholds on less than $1,700 in wages, the employee loses that withholding but doesn't get credit for it in his/her SS earnings?

Wow, that sucks. And that definitely makes me want to refund the withholding to our babysitter even if we're not _required_ to do so. If she's not going to get credit for it, it's just the right thing to do, even if it's more of a hassle for us, isn't it?

Having said all of that, I'm still not clear on these questions:

• Am *I*, as a household employer, _required_ to refund the

The first question on Schedule H, line A, is, "Did you pay any one household employee cash wages of $1,700 or more in 2011?" If the answer to this question is No, which it is in my case, go to line B.

Line B is, "Did you withhold federal income tax during 2011 for any household empmloyee?" If the answer to this question is No, which it is in my case, go to line C.

Line C is, "Did you pay total cash wages of $1,000 or more in any calendar quarter of 2010 or 2011 to all household employees?" If the answer to this question is Yes, which it is for me, skip lines 1-7 and go to line 8.

Lines 1-7 are the ones in which you report on FICA and Medicare you are obligated to pay. The form itself is telling me to skip them. So I can't pay the FICA and Medicare I withheld from our babysitter without directly contravening the form's instructions.

On the other hand, the Schedule H instructions say nothing about Lines A, B and C on the form (alas, they also say nothing about what you should do after the fact if you've withheld FICA and Medicare on wages of

I don't think so.

That page says (EMPHASIS added), "Every employer ENGAGED IN A TRADE OR BUSINESS who pays remunieration, including noncash payments, of $600 or more..."

In contrast, the Schedule H instructions say, "You must file Form W-2 for each household employee to whom you paid $1,700 or more of cash wages in 2011 that are subject to social security and Medicare taxes."

I am just about convinced that the best thing for me to do is refund the withholding, give her a statement of how much wages I paid her for the year, and let her report it for herself on her taxes.

Of course they did. That way they can fraudulently deduct personal services. Tell her to keep track of her pocketbook if she works for them again. I misinterpreted your original description of these gigs. She is not due a refund.

No, it's just domestics who got the shaft. Oddly enough, they don't have good lobbyists. Nothing changed for other employees.

Absolutely.

As I noted before, I misinterpreted your wife's situation. She will get earnings credit. All is well on that front.

Phil Marti VITA/TCE Volunteer Clarksburg, MD