17.2 Household Employment Taxes (Schedule H): FICA Thresholds, FUTA & Wage Reporting

Scope of Household Employment & Schedule H (Form 1040)

When an individual hires someone to perform domestic services in or around their private home, the homeowner may become a federal household employer. Household employment taxes are calculated on Schedule H (Form 1040), Household Employment Taxes, and attached to the employer's individual Form 1040. The resulting tax liability flows directly to Schedule 2, Line 9, and is included in the taxpayer's total tax on Form 1040, Line 23.

Domestic services covered by household employment rules include:

• Nannies, au pairs, and babysitters;
• Housekeepers, maids, and cleaning staff;
• Private home health aides and caregivers for elderly or disabled relatives;
• Personal chefs and private cooks;
• Chauffeurs, butlers, and valets;
• Yard workers and private gardeners.

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Worker Classification: Employee vs. Independent Contractor

A critical issue tested on the Special Enrollment Examination is worker classification in the domestic setting. Under IRS common law rules, a domestic worker is an employee if the homeowner has the legal right to direct and control not only what work is done, but how it is done.

The Common Law Control Test in the Home

• Household Employee (Form W-2 / Schedule H): The homeowner provides instructions on daily routines, determines work schedules, provides cleaning chemicals, tools, appliances, or food, and pays an hourly wage or salary. A nanny who cares for children in the taxpayer's home following parents' directions is an employee as a matter of law.
• Independent Contractor (Form 1099-NEC / Not on Schedule H): The worker provides services to the general public as an independent business, brings their own professional equipment and commercial supplies, sets their own schedule, decides how the tasks will be accomplished, and offers services through their own business entity. Examples include an established commercial lawn care company, an independent pest control business, or a self-employed plumber.
• Agency Placements: If an employment agency provides the worker and controls the terms of work, the worker is an employee of the agency. The agency is responsible for payroll taxes, and the homeowner has no Schedule H filing obligation. However, if the agency merely acts as a referral service or introductory platform and the homeowner directly manages and pays the worker, the homeowner is the employer.

Form SS-8: If classification is ambiguous, either the taxpayer or the worker may submit Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to the IRS for a formal determination.

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Cash Wage Threshold for FICA Taxes

Unlike commercial businesses—where Social Security and Medicare (FICA) taxes apply to the very first dollar of wages paid—household employment features a statutory annual cash wage threshold under IRC §3121(a)(7)(B).

How the Threshold Operates

1. Per-Employee Rule: The $2,800 threshold applies separately to each household employee. It is not an aggregate threshold across multiple workers. For example, if a homeowner pays Babysitter A $2,500 and Babysitter B $2,500 during 2025, neither worker reaches the $2,800 threshold, and no FICA taxes are owed for either worker.
2. The Dollar-One Trigger: The threshold is a "cliff." If cash wages paid to a single employee reach or exceed $2,800 in 2025, ALL cash wages paid to that employee during the calendar year become subject to FICA taxes, retroactive to dollar one (not just the excess over $2,800)!
3. Cash Wages Defined: Cash wages include currency, checks, money orders, electronic bank transfers (e.g., Zelle, Venmo), and cash allowances for transit or lodging. Non-cash compensation (such as food, lodging on the premises for the employer's convenience, or clothing) is strictly excluded from cash wages and does not count toward the $2,800 threshold.

Statutory FICA Tax Rates

Once the $2,800 threshold is reached, both the employer and employee owe FICA taxes:

• Social Security Tax (OASDI): 6.2% employer share + 6.2% employee share = 12.4% total. For 2025, the Social Security wage base limit is $176,100 ($168,600 for 2024).
• Medicare Tax (HI): 1.45% employer share + 1.45% employee share = 2.9% total (no wage cap).
• Total Combined FICA Rate: 7.65% employer + 7.65% employee = 15.3%.

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Employer Payment of Employee FICA Share: The Special IRC §3121(a)(5)(A) Rule

In commercial employment, employers must withhold the employee's 7.65% FICA share from their paycheck. In household employment, however, homeowners often agree to pay the employee's 7.65% share out of the employer's own pocket without deducting it from the employee's pay.

The Internal Revenue Code provides a unique statutory rule for this arrangement under IRC §3121(a)(5)(A) that appears frequently on the EA exam:

The Rule: When an employer pays the employee's share of Social Security and Medicare taxes for domestic service in a private home without deducting it from the employee's pay:

1. The employer-paid FICA tax IS treated as additional wage compensation for federal income tax purposes and must be included in Box 1 (Wages, tips, other compensation) of Form W-2.
2. The employer-paid FICA tax IS NOT treated as wages for Social Security, Medicare, or FUTA tax purposes! It is excluded from Box 3 (Social Security wages) and Box 5 (Medicare wages).

Example Walkthrough: Employer-Paid FICA
In 2025, a homeowner pays a nanny $10,000 in cash wages and agrees to pay the nanny's 7.65% FICA share ($765) out of pocket.

1. Social Security & Medicare Wages (Boxes 3 and 5): $10,000
2. FICA Tax Owed on Schedule H: $10,000 x 15.3% = $1,530 ($765 employer share + $765 employee share)
3. Federal Income Tax Wages (Box 1 of Form W-2): $10,000 cash wages + $765 employee FICA paid by employer = $10,765!

Exam Trap: Do NOT gross up the Social Security and Medicare wages in Box 3 and Box 5. Only Box 1 reflects the additional income!

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Statutory Family and Age Exemptions from FICA

Under IRC §3121(b), Congress established explicit statutory exemptions from Social Security and Medicare taxes for certain family members and young students performing domestic services:

1. Spouse Exemption

Wages paid to a spouse for household services are completely exempt from FICA and FUTA taxes, regardless of the amount paid.

2. Child Under Age 21 Exemption

Wages paid to the taxpayer's biological, adopted, or stepchild under age 21 for domestic services in the parent's home are completely exempt from FICA taxes. (Note: Wages paid to a child under age 21 are also exempt from FUTA).

3. Parent Exemption & The Narrow Child Care Exception

Wages paid to the taxpayer's mother or father for domestic services are generally exempt from FICA and FUTA taxes. However, there is one critical statutory exception where wages paid to a parent ARE subject to FICA (the "Child Care Exception").

FICA applies to a parent only if ALL three conditions are met:

1. The parent provides care for the taxpayer's child (or stepchild) who lives in the home; and
2. The child is under age 18, or has a physical or mental condition requiring personal care of an adult for at least 4 continuous weeks in the calendar quarter; and
3. The taxpayer is divorced and not remarried, or is a widow/widower, or is married to a spouse who has a physical or mental condition that prevents them from caring for the child for at least 4 continuous weeks in the calendar quarter. Important: Even if this narrow exception applies and wages paid to a parent become subject to FICA, wages paid to a parent are NEVER subject to FUTA.

4. Workers Under Age 18 (The Student Rule)

Wages paid to a household worker who is under age 18 at any time during the year are exempt from FICA taxes, unless household employment is the employee's principal occupation.

• If the worker is a student, domestic service is legally considered not to be their principal occupation, exempting all their wages from FICA even if they earn $2,800 or more.
• Example: A 17-year-old high school student babysits for a family during summer and weekends, earning $3,500 in 2025. Because the student is under 18 and a student, the family owes zero FICA taxes, and no Schedule H is required.

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Federal Unemployment Tax Act (FUTA) on Schedule H

Federal unemployment taxes are governed by completely separate statutory rules and thresholds under IRC §3306:

The $1,000 Quarterly Threshold

An employer is subject to FUTA tax on household workers if the employer paid total cash wages of $1,000 or more to all household employees combined in any calendar quarter of the current calendar year or the preceding calendar year.

Critical Contrast with FICA:

• FICA: Evaluated on an annual per-employee basis ($2,800 in 2025).
• FUTA: Evaluated on a quarterly aggregate basis ($1,000 across all workers combined).

FUTA Tax Calculation & The State Tax Credit

• Tax Base: FUTA applies only to the first $7,000 of cash wages paid to each employee per calendar year.
• Gross FUTA Rate: The statutory federal gross rate is 6.0% under IRC §3301.
• Maximum State Unemployment Credit: Under IRC §3302, employers receive a maximum credit of up to 5.4% for timely contributions paid into state unemployment insurance (SUTA) funds.
• Effective Net FUTA Rate: 6.0% gross - 5.4% credit = 0.6%.
• Maximum Federal Tax Per Employee: $7,000 wage base x 0.6% = $42.00 per year.
• 100% Employer-Paid: FUTA is paid entirely by the employer. It can never be withheld or deducted from an employee's wages.

Family Exemptions from FUTA

Wages paid to the following relatives for domestic services are ALWAYS exempt from FUTA, regardless of wages paid:

• The taxpayer's spouse;
• The taxpayer's child under age 21; and
• The taxpayer's parents (under all circumstances, even if subject to FICA under the child care exception).

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Comprehensive Domestic Employee Tax Rules Matrix

Federal Income Tax Withholding Rule: Homeowners are not required to withhold federal income tax from a household employee's wages. Income tax withholding is entirely voluntary and occurs only if both the employer and employee mutually agree (with the employee providing a completed Form W-4).

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Annual Reporting and Information Returns Workflow

Employers of household workers must follow a strict federal compliance roadmap:

1. Employer Identification Number (EIN): The homeowner must obtain an EIN via Form SS-4 or online at IRS.gov. A homeowner cannot use their personal Social Security Number to report household employment taxes on Forms W-2 or W-3.
2. Form W-2 (Wage and Tax Statement): If wages are subject to FICA (or if income tax was voluntarily withheld), the employer must furnish Copy B, C, and 2 of Form W-2 to the employee by January 31 following the close of the calendar year.
3. Form W-3 (Transmittal of Wage and Tax Statements): The employer must file Copy A of Form W-2 along with transmittal Form W-3 with the Social Security Administration (SSA) by January 31.
4. Schedule H (Form 1040): The employer reports total household employment taxes (FICA, FUTA, and any withheld income tax) on Schedule H, filed alongside their Form 1040 by April 15.
5. Estimated Tax Penalty Protection: Because Schedule H taxes flow to Form 1040, Line 23, they are fully included in the taxpayer's total tax liability for purposes of the underpayment of estimated tax penalty under IRC §6654. Homeowners should increase their own W-4 wage withholding or submit quarterly Form 1040-ES payments to avoid penalties on unpaid household taxes.