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When filling out a W2 for a household employee in which I want to cover their percentage of all the taxes, what should I enter in the varying wage boxes?

Let's say that over the course of 2014 I paid the individual $3500.00 and with held nothing. I'd like to cover their taxes and obviously my own. In preparing the W2 would the below be accurate...? I believe it's slightly off and that I would need to determine the 3500 in pay in addition to the taxes as the wages reported thus making box 1 equal to 3500 + (3500 * 0.1000) + (3500 * 0.0620) + (3500 * 0.0145).

Box 1 would be 3500
Box 2 would be 3500 * 0.1000
Box 3 would be 3500
Box 4 would be 3500 * 0.0620
Box 5 would be 3500
Box 6 would be 3500 * 0.0145

With that, what is the correct approach to achieve what I am after?

UPDATE:

There seems to be confusion on what I am trying to do. Fundamentally I want to cover the household employees portion of taxes and then make sure the W2 matches accordingly. No this does not have to be with held but can be paid now, at the point of filing as noted by the IRS.

Social Security and Medicare Taxes (Federal Insurance Contributions Act – FICA) If you pay cash wages of $1,900 or more for 2015 (this threshold can change from year to year) to any one household employee, you generally must withhold 6.2% of Social Security and 1.45% of Medicare taxes (for a total of 7.65%) from all cash wages you pay to that employee. You also must pay your share of Social Security and Medicare taxes, which is also 7.65% of cash wages. (Cash wages include wages you pay by check, money order, etc.) Unless you prefer to pay your employee's share of Social Security and Medicare taxes from your own funds, you should withhold 7.65% from each payment of cash wages made.

Does anyone have direct experience with household employees that can offer factual advice to what I am trying to achieve?

  • You seem to be asking whether you can retroactively withhold the tax, which you can't. If you want to "cover" their taxes, it's too late to do that now (except indirectly by paying them some sort of bonus now to compensate them for their tax costs from last year). If you want to cover their taxes in the future, you should start now for this year. – BrenBarn Jan 31 '15 at 22:58
  • BrenBarn It's semantics. It does not need to be done throughout the year. The agreement is we will pay the employees portion of SS, Medicare, and Federal. Assume it was withheld as the question still remains about what to place in the boxes. – Aaron McIver Jan 31 '15 at 23:08
  • @AaronMcIver who gave you the right to make such an agreement? The employee's portion is employees, not yours. Legally - you cannot pay their taxes. You can only give them more money, which is considered compensation, aka bonus, aka raise - and is taxable and reportable in box 1. – littleadv Feb 1 '15 at 0:36
  • The IRS. Unless you prefer to pay your employee's share of Social Security and Medicare taxes from your own funds, you should withhold 7.65% from each payment of cash wages made. – Aaron McIver Feb 1 '15 at 1:20
  • I'm confused. Did you pay the employees share, or you want to compensate the employee for the share they need to pay? Did you withhold from their pay or you want to pay from your own money? What exactly are you doing here and how the W2 boxes are related to it? – littleadv Feb 1 '15 at 1:55
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To clarify that legality of this (for those that question it), this is directly from IRS Publication 926 (2014) (for household employees):

If you prefer to pay your employee's social security and Medicare taxes from your own funds, do not withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.

I am sorry this does not answer your question entirely, but it does verify that you can do this.

UPDATE: I have finally found a direct answer to your question! I found it here: http://www.irs.gov/instructions/i1040sh/ar01.html

Form W-2 and Form W-3

If you file one or more Forms W-2, you must also file Form W-3.

You must report both cash and noncash wages in box 1, as well as tips and other compensation. The completed Forms W-2 and W-3 in the example (in these instructions) show how the entries are made. For detailed information on preparing these forms, see the General Instructions for Forms W-2 and W-3.

Employee's portion of taxes paid by employer. If you paid all of your employee's share of social security and Medicare taxes, without deducting the amounts from the employee's pay, the employee's wages are increased by the amount of that tax for income tax withholding purposes. Follow steps 1 through 3 below. (See the example in these instructions.) Enter the amounts you paid on your employee's behalf in boxes 4 and 6 (do not include your share of these taxes).

Add the amounts in boxes 3, 4, and 6. (However, if box 5 is greater than box 3, then add the amounts in boxes 4, 5, and 6.)

Enter the total in box 1.

  • Perfect, just what I was looking for! – Aaron McIver Feb 4 '15 at 3:17
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I have an indirect answer for you. It is not a numeric answer but it is a procedure.

The challenge with paying taxes for an employee besides their share of Social security and Medicare is that you have no idea what their state and Federal taxes are.

Are they married, single, head of household? Is this their entire families income, or is it extra money to make ends meet? What about state taxes?

It looks like you will need a W-4 from them.

As you know the IRS Tax topic 756 has all the info you need.

Federal Income Tax Withholding

You are not required to withhold federal income tax from wages you pay to a household employee. However, if your employee asks you to withhold federal income tax and you agree, you will need a completed Form W-4 (PDF), Employee's Withholding Allowance Certificate from your employee. See Publication 15, (Circular E), Employer's Tax Guide, which has tax withholding tables that are updated each year.

Form W-2, Wage and Tax Statement

If you must withhold and pay Social Security and Medicare taxes, or if you withhold federal income tax, you will need to complete Form W-2 (PDF), Wage and Tax Statement, for each employee. You will also need a Form W-3 (PDF), Transmittal of Wage and Tax Statement. See "What Forms Must You File?" in Publication 926 (PDF) for information on when and where to furnish and file these forms. To complete Form W-2 you will need an employer identification number (EIN) and your employees' Social Security numbers. If you do not already have an EIN, you can apply for one using the online EIN application available on IRS.gov. This service is available Monday through Friday, 7 a.m. to 10 p.m. Eastern time. You can also apply for an EIN by mailing or faxing a completed Form SS-4 (PDF), Application for Employer Identification Number. International applicants may apply by calling 267-941-1099 (not a toll-free number) Monday through Friday, 6 a.m. to 11 p.m. Eastern time to obtain their EIN. Refer to Topics 752 and 755 for further information.

Don't forget Federal Unemployment Tax.

Pub 15 will have tables so you can determine how much you should have been withholding if you had gone that route. It will be easiest to use a spreadsheet to do the calculations so that what you gave them in their checks is their net pay not their gross. The tables are constructed under the assumption you know their gross pay.

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Expanding on @stacy's answer with an illustration

Box 1 would be 3767.75 = (3500 + 3500*(0.0620 + 0.0145))
Box 2 would be whatever their federal withholding is
Box 3 would be 3500
Box 4 would be 3500 * 0.0620
Box 5 would be 3500
Box 6 would be 3500 * 0.0145

In other words, when you pay your employee's share of FICA and Medicare taxes, you are effectively increasing their gross taxable income by the amount of tax you paid on their behalf, and then withholding from that increased gross as usual. However, that increased amount is NOT subject to additional FICA/Medicare tax.

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