IRS ANSWERS QUESTIONS ON HOUSEHOLD EMPLOYEE REPORTING AND WITHHOLDING.

Notice 95-18

I. PURPOSE AND BACKGROUND

This notice addresses the application to household employers of new rules regarding federal employment taxes and income tax withholding. Section 2 of the Social Security Domestic Employment Reform Act of 1994 (the Act), Pub. L. 103-387, enacted section 3510 and amended section 3121 of the Internal Revenue Code.

The Act makes two major changes in the rules applicable to household employers:

(1) Effective for wages paid after December 31, 1994, reporting and payment of social security and Medicare taxes under the Federal Insurance Contributions Act (FICA), the tax imposed under the Federal Unemployment Tax Act (FUTA), and any withheld income tax are now required on a calendar year basis; and

(2) Effective for wages paid after December 31, 1993, household employers are no longer liable for FICA taxes with respect to any household employee to whom the employer pays less than $1,000 during the year.

Starting in 1995, the new law also provides an exception from FICA taxes with regard to cash wages paid for domestic service in a private home of the employer which is performed in any year by an individual under the age of 18 during any portion of such year, provided the service is not the principal occupation of the employee.

Previous rules required quarterly reporting and payment of FICA taxes. Before the 1994 legislation, the threshold for FICA tax liability was $50 per calendar quarter. In years prior to 1995, household employers were generally required to file Form 942, Employer's Quarterly Tax Return for Household Employees, for FICA taxes and withheld income taxes and Form 940 (or 940-EZ), Employer's Annual Federal Unemployment (FUTA) Tax Return, for FUTA taxes. Although the Act changed the reporting and payment requirements for the FUTA tax for 1995, the threshold for FUTA tax liability remains the same. The Act also did not change the law regarding income tax withholding, which continues to be required only if the employer and the employee agree. Finally, employers of household employees must give the appropriate copies of the Form W-2, Wage and Tax Statement, to each employee by January 31 of the following year. The employers must file Copy A of Form W-2, Wage and Tax Statement, with the Social Security Administration by the last day of February of the following year. For additional information concerning household employers, taxpayers may wish to refer to IRS Publication 926, Employment Taxes for Household Employers, and IRS Publication 15, Circular E, Employer's Tax Guide. See Q&A-3 of this notice, however, for more information concerning household employers who must otherwise file a Form 941, Employer's Quarterly Federal Tax Return, and a Form 940 (or 940-EZ), Employer's Annual Federal Unemployment (FUTA) Tax Return, for employees who are not household employees.

II. QUESTIONS AND ANSWERS

Q-1 HOW DOES THE $1,000 THRESHOLD FOR FICA TAXES APPLY?

A-1 Beginning in calendar year 1994, FICA taxes are not required to be paid with respect to cash remuneration of less than $1,000 paid to any household employee in a calendar year. However, if the cash remuneration paid to any household employee by a household employer is $1,000 or more in a calendar year, all of the cash remuneration (including the first $1,000) paid to that employee is subject to the FICA taxes.

Q-2 WHAT ARE THE REPORTING REQUIREMENTS FOR HOUSEHOLD EMPLOYERS?

A-2 Beginning in 1995, household employers no longer will file Form 942, the quarterly return for reporting FICA and withheld income taxes. Individuals who are household employers are now required to report FICA taxes and withheld income tax with respect to household employees on new Schedule H, which will be filed with their individual income tax returns. Also, instead of filing Form 940 (or 940-EZ) to report FUTA taxes, these individuals will include information regarding their FUTA taxes on Schedule H.

Q-3 MAY EMPLOYERS THAT ARE OTHERWISE REQUIRED TO FILE FORM 941 USE FORM 941 FOR HOUSEHOLD EMPLOYEES?

A-3 Employers that have employees who are not household employees are required to file Form 941 on a quarterly basis for their employees who are not household employees.

Circular E and Publication 926 state that sole proprietors who file Form 941 for business employees must include the employment taxes for household employees on the Form 941 and the Form 940 (or 940-EZ). Nevertheless, employers that have both household employees and employees who are not household employees may, until further notice, choose either of two options for reporting employment taxes, including any withholding of income tax, with respect to the household employees. These employers may either:

(1) Report FICA and FUTA taxes and any income tax withholding for household employees annually on Schedule H, and report FICA and FUTA taxes and any income tax withholding for other employees on Form 941 and on Form 940 (or 940-EZ); or

(2) Report FICA taxes and any income tax withholding for ALL employees (household employees and other employees) quarterly on Form 941 and report FUTA taxes annually for ALL employees on Form 940 or Form 940-EZ.

Q-4 MAY ADMINISTRATORS, EXECUTORS AND TRUSTEES USE THE $1,000 THRESHOLD?

A-4 For FICA, FUTA and income tax withholding purposes, an administrator or executor of an estate that maintains a home as a private home for the decedent's family, or a trustee of a trust that maintains a home as a private home for a beneficiary of the trust, is considered a household employer of any employee who performs domestic service in the home. Therefore, beginning in 1994, if the administrator, executor or trustee pays cash remuneration to a household employee of less than $1,000 in a calendar year, the administrator, executor or trustee is not required to pay FICA taxes for that employee for that year. For purposes of determining whether cash remuneration of less than $1,000 has been paid to the household employee, the cash remuneration paid to a household employee by an administrator, executor or trustee in a calendar year will be aggregated with the cash remuneration paid to the household employee in the same calendar year by the household of the decedent or beneficiary for whom the administrator, executor or trustee is acting.

Example: In April 1995, X hires A (who is over age 18) to perform housekeeping services in X's private home. In June 1995, after paying A $400 for services, X dies. A subsequently continues to perform housekeeping services in X's private home for X's family during the period of administration of X's estate. Between July and December 1995, Y, the administrator of X's estate, pays A $800 from X's estate for services performed in X's private home. Because the sum of the cash remuneration paid to A by X and Y (as administrator for X's estate) is $1200 during 1995, FICA taxes must be paid on the entire amount.

Instructions to facilitate proper payment and reporting by administrators, executors and trustees will be forthcoming.

Q-5 HOW SHOULD STATE AND LOCAL GOVERNMENT HEALTH AND WELFARE AGENCIES REPORT THE WAGES OF HOUSEHOLD EMPLOYEES?

A-5 In some cases, pursuant to section 3504 of the Code, state and local government health and welfare agencies assume responsibility for reporting and paying FICA and FUTA taxes and any withheld income tax with respect to individuals furnished by the agencies to provide household services for recipients of public assistance. See Rev. Proc. 80-4, 1980-1 C.B. 581. These state and local government health and welfare agencies must report FICA taxes and withheld income taxes with respect to these individuals quarterly on a Form 941 and report FUTA taxes for these individuals annually on a Form 940.

To facilitate proper processing, state and local government health and welfare agencies that act as agents pursuant to Rev. Proc. 80-4 should obtain a separate Employer Identification Number for use in reporting these taxes.

The Internal Revenue Service will waive penalties for agents acting pursuant to Rev. Proc. 80-4 for failure to deposit the FICA and FUTA taxes and withheld income taxes on wages paid to household employees during 1995, provided all taxes are deposited on or before the due date of the applicable return. To claim the waiver, "Household Employer Agent" should be written at the top center of the Form 941 and the Form 940 (or 940-EZ).

For more information, see Rev. Proc. 80-4, supra, and Rev. Proc. 70-6 , 1970-1 C.B. 420, which it amplifies.

Q-6 WHAT IS THE DUE DATE FOR PAYING FICA AND FUTA TAXES AND ANY WITHHELD INCOME TAXES WITH RESPECT TO HOUSEHOLD EMPLOYEES?

A-6 a. TAXPAYERS FILING SCHEDULE H. Taxpayers who file Schedule H must pay FICA and FUTA taxes and any withheld income taxes by the due date for their individual income tax returns, not including any extensions, for the applicable year. Taxpayers can avoid a balance due with their income tax returns if they plan ahead. To pay employment taxes, these employers can increase their quarterly estimated tax payments or request their employer to withhold more income tax from their wages. Estimated tax penalties will not apply, however, before 1998 to underpayments of estimated tax due to employment taxes reported on Schedule H.

b. TAXPAYERS FILING FORMS 941 AND 940. Taxpayers who file Forms 941 and 940 (or 940-EZ) must pay or deposit FICA and FUTA taxes and any withheld income taxes for the household employees in accordance with the rules that apply to payment and deposit of those taxes with respect to employees who are not household employees. But see Q&A-5 regarding waiver of failure to deposit penalties for agents filing pursuant to Rev. Proc. 80-4.

III. EFFECT ON OTHER PUBLICATIONS

Rev. Proc. 70-6, 1970-1 C.B. 420, is modified; and Rev. Proc. 80-4 , 1980-1 C.B. 581, is amplified.

IV. COMMENTS REQUESTED

The Service invites comments from taxpayers and practitioners on the administrability and impact of this notice. In particular, the Service requests comments regarding whether employers who otherwise must file a Form 941, Employer's Quarterly Federal Tax Return, for employees who are not household employees should be required to file a separate Schedule H with respect to household employees, instead of using the Form 941 for both the household employees and other employees. The Service also specifically invites comments on the deposit rules that should apply to agents depositing taxes pursuant to Rev. Proc. 80-4.

Written comments should be submitted no later than Friday, June 30, 1995, to:

     Associate Chief Counsel