The regular income tax figured on taxable income may not be the net amount of taxes you owe for the year. There are additional taxes that may apply to you. For example, if you employ a household worker, such as a nanny, you may owe employment taxes for this worker (38.1–38.4). If you fail to have minimum essential health coverage for 2017 and are not exempt, there is a penalty tax unless Congress changes the law (see the e-Supplement at jklasser.com for any update) (38.5–38.6).

Most additional taxes are listed in a special section of Form 1040 called “other taxes”; the alternative minimum tax is found in the “tax and credits” section of the return. Some of these other taxes are covered in this chapter; others are covered in other chapters as noted in Table 38-1.

Estimated taxes (27.1–27.5) are not a separate tax liability; they are merely a way in which to pay taxes where income tax withholding does not cover the expected tax bill for the year.

38.1 Overview of Household Employment Taxes

If you hired someone to do household work in or around your home and you were able to control what work he or she did and how it was done, you had a household employee. This could include a babysitter, house cleaner, cook, nanny, yard worker, maid, driver, health aide, or private nurse. Unless an exception applies (see below), such a worker is your employee regardless of whether the work is full or part time or whether you hired the worker through an agency or from a list provided by an agency or association. Also, it does not matter if the wages were paid for work done on an hourly, daily, weekly, or per-job basis.

If a worker is your household employee, you may have to withhold and pay Social Security and Medicare taxes (FICA, 38.2) and pay federal unemployment tax (FUTA, 38.4).

Workers who are not your employees. Workers you hire through an agency are not your employees if the agency is responsible for who does the work and how it is done. If you use a placement agency that exercises control over what work is done and how it is done, the worker is not your employee. Self-employed workers are also not your employees; in addition to maintaining control over how their work is done, self-employed workers usually provide their own tools and offer services to the general public. For example, you need work done on your lawn and you hire the self-employed owner of a lawn care business, who provides his own tools and supplies and hires and pays any other workers as needed. He and his workers are not your household employees.

Notable exceptions to the household employee definition. You do not have to file a Schedule H and pay Social Security, Medicare, or federal unemployment taxes if the household employee was your spouse, your child who was under age 21, or, in most cases, your parent. However, for Social Security and Medicare tax (38.2) purposes, you must treat your parent as your household employee if he or she takes care of your child in your home and (1) the child is either under age 18 or has a physical or mental condition that requires personal care by a adult for at least four continuous weeks in a calendar quarter, and (2) you are divorced and not remarried, widowed, or are living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least four continuous weeks in a calendar quarter.

For Social Security and Medicare tax purposes, you do not have to include wages paid to an individual who is under age 18 at any point during the year so long as his or her principal occupation is not providing household services; a student under age 18 qualifies for this exception and is not considered a household employee.

Verifying employment status. It is unlawful to employ an alien who cannot legally work in the United States. If you hire a household employee to work for you on a regular basis, you and the employee must each complete part of the U.S. Citizenship and Immigration Services (USCIS) Form I-9, “Employment Eligibility Verification.” By looking at documents that the employee shows you, you must verify that he or she is either a U.S. citizen or an alien who can legally work in the U.S. and you must keep Form I-9 for your records. The form and a USCIS Handbook for Employers can be obtained at www.uscis.gov or by calling (800) 870-3676. For answers to other questions about the employment eligibility verification process or other immigration-related matters, contact the USCIS Office of Business Liaison at (800) 357-2099.

Employee’s Social Security number. You are required to get each employee’s name and Social Security number and enter them on Form W-2. This applies to both resident and nonresident alien employees. You may not accept an individual taxpayer identification number (ITIN) in place of an SSN. An ITIN is only available to resident and nonresident aliens who are ineligible to work in the U.S. and need identification for tax purposes. You may verify up to 10 names and numbers by calling the Social Security Administration and registering for automated telephone access at (800) 772-6270, or by getting online access at www.socialsecurity.gov/employer.

38.2 Social Security and Medicare (FICA) Taxes for Household Employees

Income tax withholding is not required for a household employee (38.3), but generally you must withhold Social Security and Medicare (FICA) taxes from the employee’s cash wages and also pay the employer share of FICA yourself, unless the wages are below an annual threshold, which for 2017 is $2,000. You report and pay the FICA taxes on Schedule H, which you must attach to your Form 1040; see 38.3. If you pay the household employee cash wages of less than $2,000, the wages are not subject to FICA taxes.

Once payments to a household employee (see 38.1 for employee exceptions) equal or exceed $2,000 in 2017, the entire amount, including the first $2,000, is subject to FICA taxes. The $2,000 threshold may be increased for 2018 by an inflation adjustment.

Tax rates. If in 2017 you pay your household employee cash wages of $2,000 or more, you are liable for: (1) Social Security taxes at the rate of 12.4% (6.2% for you and also 6.2% for your employee) on wages up to the annual Social Security wage base, which for 2017 is $127,200, and (2) Medicare taxes at a rate of 2.9% (1.45% for each of you) on all wages with no limit.

You are responsible for paying your employee’s share of Social Security and Medicare taxes as well as your own share. You must either withhold your employee’s share from his or her wages or pay it from your own funds. On Schedule H, you are liable for the total tax, both your share and the employee’s share (38.3). If you decide to pay the employee’s share of the Social Security and Medicare taxes from your own funds rather than withholding the taxes from the employee’s pay, you must treat your payment as additional wages when you report the employee’s wages on his or her Form W-2, but the payment is not considered wages for purposes of figuring your FICA or FUTA liability on Schedule H; see the Example in 38.3.

Withholding requirement for Additional Medicare Tax if employee paid over $200,000. In the unlikely situation where wages paid to a household employee exceed $200,000 for the year, you must withhold from your employee’s pay, in addition to the 1.45% Medicare tax, the 0.9% Additional Medicare Tax from the wages exceeding $200,000 (28.2). The 0.9% tax is imposed only on the employee; there is no separate employer share.

Estimated taxes. To cover the household employment taxes that you owe, you may need to increase the federal income tax withheld from your pay or pay estimated taxes to avoid an estimated tax penalty (27.1).

Reporting options for self-employed persons who have regular business employees as well as household employees. Self-employed persons who have business employees in addition to household employees may use one of the following reporting options:

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

Small employers whose annual liability for Social Security, Medicare, and withheld federal income tax is $1,000 or less may be notified by the IRS that they must file Form 944 to report and pay the taxes only once a year, instead of quarterly on Form 941. If you are a new employer filing Form SS-4 to get an EIN (38.3) and expect to have $1,000 or less of employment tax liability, you may tell the IRS on the Form SS-4 that you would like to file Form 944. You may also make a request to use Form 944 if you have used Form 941 but expect to have employment tax liability of $1,000 or less for the upcoming calendar year; you must make the request by the deadline specified in the Form 944 instructions. If you receive a notification from the IRS that you must file Form 944, you may request a change to Form 941 filing; see the Form 944 instructions.

Employers of household employees must also give copies of Form W-2 (“Wage and Tax Statement”) to each employee and to the Social Security Administration, as discussed in 38.3.

38.3 Filing Schedule H To Report Household Employment Taxes

You must file Schedule H with your 2017 Form 1040 if you paid any one household employee cash wages of $2,000 or more in 2017, or withheld federal income tax during 2017 for a household employee, or paid cash wages totaling $1,000 or more in any calendar quarter during 2016 or 2017 to all household employees. On Schedule H, you report the Social Security and Medicare taxes (38.2), federal income taxes withheld, if any (see below), and federal unemployment taxes (38.4) for your household employees. Total household employment taxes from Schedule H are entered as an “Other tax” on Line 60a of your Form 1040.

If you get an extension to file your return, file Schedule H with the return by the extended due date. If you are not required to file a 2017 tax return, you may file Schedule H by itself by the filing deadline, April 17, 2018. The completed Schedule H should be mailed to the same address that you would use for filing a return, along with a check or money order for the total household employment taxes due.

Withholding federal income taxes. Income tax withholding is not required for a household employee, but if the employee requests withholding and you agree to do it, the employee must furnish you with a complete Form W-4, “Employee’s Withholding Allowance Certificate.” Use the income tax withholding tables in IRS Publication 15 (Circular E, Employer’s Tax Guide), which has detailed instructions.

The earned income credit (EIC). Copy B of Form W-2 has a notice about the EIC. If you do not give Copy B (or a substitute with similar EIC information) to your household employee by January 31, 2018, you must provide equivalent EIC notice on Notice 797 or your own written equivalent statement by the January 31 deadline. If you agreed to withhold federal income taxes from the employee’s 2017 wages, but a Form W-2 is not required (under the Form W-2 instructions), the EIC notice should be given to the employee by February 7, 2018.

Fringe benefits. All or part of the value of certain fringe benefits is specifically excluded from a household employee’s taxable wages. If you provide a household employee with lodging or meals on your premises, the benefits are not taxable if furnished for your convenience as a condition of employment. You may also provide tax-free transportation assistance to an employee. The tax-free limit for transportation fringe benefits in 2017 is $255 per month for transit passes you give to your household employee, and $255 per month for reimbursements you provide for your employee’s parking costs near your home or near a mass transit location from which your employee commutes to your home.

Employer identification number (EIN). If you have a household employee, you will need an employer identification number (EIN) to report employment taxes on Schedule H. You can obtain an EIN by completing Form SS-4, Application for an Employer Identification Number. The number can be obtained immediately by phone, over the Internet, or in four weeks if you apply by mail. If you applied for an EIN and are still waiting for it when filing Schedule H, do not enter your Social Security number as a substitute. Instead, enter “Applied For” and the date you applied for the EIN in the space provided for the number on Schedule H.

Forms W-2 and W-3. You need an EIN in order to properly file the necessary W-2 and W-3 forms. You must file a Form W-2 for each household employee to whom you paid $2,000 or more of cash wages in 2017 that are subject to Social Security and Medicare (FICA) taxes. You also must file Form W-2 for an employee whose wages were not subject to FICA taxes (38.1) but for whom you withheld income taxes. Furnish copies B, C, and 2 of Form W-2 to your household employee by January 31, 2018.

If you file one or more Forms W-2 for 2017, you must also file a Form W-3, Transmittal of Wage and Tax Statement. You must send Copy A of all Forms W-2 together with Form W-3 to the Social Security Administration (SSA) by January 31, 2018, whether you submit Forms W-2 and W-3 on paper or file electronically.

38.4 Federal Unemployment Taxes (FUTA) for Household Employees

As an employer, you are also liable for FUTA (federal unemployment taxes) for 2017 in Part II of Schedule H if you paid cash wages of $1,000 or more for household services (by all household employees) during any calendar quarter of 2017 or in any calendar quarter of 2016. Your employee is not liable for FUTA. You must pay it with your own funds. You do not pay FUTA on wages paid to your spouse, your parents, or your children under age 21. Schedule H is attached to your Form 1040. If you have regular business employees, see 38.2 for more reporting options.

The FUTA rate is 6% of the first $7,000 of cash wages paid to each household employee in 2017. However, there is a credit of up to 5.4% for state unemployment taxes that reduces FUTA liability, resulting in a net tax of 0.6% where the full 5.4% credit is available. Only employers that pay all the required state unemployment fund contributions for 2017 by April 17, 2018, will receive the full credit; the credit for contributions made after this date, is limited to 90% of the pre-deadline credit.

Employers in some states will not be entitled to the full 5.4% credit because the state owes money to the federal unemployment fund. A worksheet in the Schedule H instructions shows the reduced credit rate allowed in the affected states.

38.5 Individual Responsibility Penalty

If you fail to have minimum essential health coverage for you and your dependents and you are not exempt from this mandate (38.6), you owe a penalty tax called the shared responsibility payment. If you are married filing jointly, you and your spouse are jointly liable for the penalty.

For 2017, the shared responsibility payment is the greater of:

• Alternative 1: 2.5% of your household income in excess of the 2017 filing threshold for your filing status (page 3), or
• Alternative 2: $695 per adult in your household and $347.50 for a dependent child under age 18, but no more than $2,085

There is also a cap on the penalty (greater of Alternative 1 or Alternative 2) that applies only in cases of extremely high incomes: the penalty tax cannot be more than the national average premium for a bronze level policy offered through the exchange (Marketplace). For 2017, this is $3,264 per individual ($272 per month x 12 months), limited to $16,320 for a family of five or more ($272 x 5 = $1,360 per month x 12 months = $16,320).

If you lack minimum essential coverage (defined below) for three months or more and do not have an exemption, figure the penalty for 2017 by dividing the amount found above by ¹/₁₂ and then multiply it by the number of months with neither coverage nor an exemption. As long as you have minimum essential coverage for at least one day during a month, you are considered to have coverage for that entire month. The instructions for Form 8965 (“Health Coverage Exemptions”) have a flowchart and worksheets you can use to figure your penalty.

Minimum essential coverage. The shared responsibility provision of the Affordable Care Act requires you to have minimum essential coverage for yourself, your spouse and your dependents unless you or they have an exemption (38.6) from the requirement. Minimum essential coverage is a medical plan that provides health insurance coverage as required by the Affordable Care Act. The plan may be:

• Individual coverage purchased through a government exchange (the federal or your state’s marketplace) or directly from an insurance company
• An employer plan (including COBRA and retiree coverage)
• A government plan (e.g., Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE, veterans health care programs)
• Peace Corps volunteer programs
• Self-funded health coverage of universities for their students
• Department of Defense Nonappropriated Fund Health Benefits Program
• Refugee medical assistance
• Coverage through a Basic Health Program (BHP) standard health plan

You can be covered under a different health plan than your spouse and dependent children, so long as you each have minimum essential coverage (or have an exemption).

Not all types of coverage are treated as minimum essential coverage. For example, dental and vision coverage, worker’s compensation, and coverage for a specific disease or condition, such as cancer, do not qualify as minimum essential coverage.

Household income. Household income is a new term in the tax law. The starting point is your adjusted gross income, plus the adjusted gross income of your dependents for whom you may claim a personal exemption if they are required to file a tax return, increased by any excludable foreign earned income and tax-exempt interest for you and your dependents.

Report the penalty tax on Form 1040 or Form 1040A. If you have full-year coverage and thus do not owe the shared responsibility payment, check the box on line 61 of Form 1040, Line 38 of Form 1040A, or Line 11 of Form 1040EZ. Otherwise, enter the penalty tax on Line 61, Line 38, or Line 11, as applicable. You should receive a Form 1095-B or Form 1095-C that reports the months of coverage for each covered individual if you have minimum essential coverage from an employer or government plan, or a policy purchased on the individual market (but not through a government exchange, which will send you a Form 1095-A).

38.6 Exemption from Individual Responsibility Payment

Even if you do not have minimum essential health coverage, you do not owe a penalty tax if you qualify for a coverage exemption and file Form 8965 (“Health Coverage Exemptions”) with your tax return. Exemptions available for 2017 include:

• You lack minimum essential coverage for less than three months in 2017
• The lowest-priced coverage available to you through an exchange costs more than 8.16% of your household income (household income is defined in 38.5)
• Your household income or your gross income is below your tax filing threshold (page 3)
• You are a member of a federally recognized Native American tribe or are eligible for services through an Indian Health Services provider
• You are a member of a recognized health care sharing ministry
• You are a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare
• You are incarcerated
• You are not lawfully in the U.S.
• You claim hardship

Hardship. There are currently more than a dozen recognized hardship situations that entitle you to be exempt from the individual mandate and avoid the penalty tax. More situations may be added to this list; see the e-Supplement at jklasser.com.

• You are homeless
• You were evicted in the past six months or are facing eviction or foreclosure
• You receives a shut-off notice from a utility company
• You recently experienced domestic violence
• You recently experienced the death of a close family member
• You experienced a fire, flood, or other disaster that caused substantial damage to your property
• You filed for bankruptcy within the last 6 months
• You had medical expenses you couldn’t pay in the last 24 months which resulted in substantial debt
• You experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member
• Your child, who is your dependent, has been denied coverage in Medicaid and CHIP, and another person is required by court order to give medical support to the child; you are exempt from the penalty for this child
• You become eligible for enrollment in a qualified health plan (QHP) through an exchange as a result of an eligibility appeals decision (this enrollment now entitles you to lower month premiums or cost-sharing reductions)
• You are ineligible for Medicaid because your state did not expand its eligibility rules under the Affordable Care Act
• Your health care policy was canceled and you believe other plans offered through the exchange are unaffordable
• You were eligible for the health coverage tax credit but failed to obtain coverage
• You experienced another hardship in obtaining health coverage (something you’ll need to explain)

Some of the exemptions are available only through the exchange, some only from the IRS, and some from either. If you are claiming any of these exemptions, you must file Form 8965, “Health Coverage Exemptions,” with your return. If you obtained an exemption from an exchange (Marketplace) when applying for coverage, complete Part I of Form 8965 and enter the Exemption Certificate Number (ECN) received from the Marketplace (or indicate that the Marketplace was still processing your request when you filed your return). If you are claiming an exemption when you file your return, complete Part II or Part III of Form 8965. Instructions for Form 8965 list a code for each exemption option.