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To reduce accounting issues, the risk of penalties, and dual reporting, household employers should avoid filing Form 941 and use Schedule H instead.
Figuring out and filing household employment taxes can be confusing and time-consuming. Even the most well-organized and tax-savvy families can get tripped up by small details that will cause big headaches down the road. Using Form 941 and not Schedule H is a common way families, accountants, and business payroll firms handling household payroll make mistakes when reporting domestic employment taxes.
This misstep can make more work for the family, increase the risk of penalties, cause dual reporting to the IRS, and create other accounting issues.
More work and potential penalties for you
Schedule H was created specifically for household employers to report wages paid to employees during the year. It’s an annual filing that’s prepared with your personal income tax return income.
Form 941, however, is filed every quarter even if you didn’t pay an employee during that period. If you fail to file Form 941 – even if there was no payroll to report – you will incur penalties.
Often times a business payroll firm will file a family’s household employment taxes using Form 941 as they do with their commercial clients. A family’s accountant may do the same since they may not frequently deal with clients who have domestic employees.
To save yourself time and avoid costly penalties, just file Schedule H once, and don’t worry about doing this every quarter.
Dual reporting
When filing Schedule H – as domestic employers are required to do – the total household payroll tax due is added to your personal return (Form 1040) and could decrease your anticipated refund or increase what you owe.
If you’ve filed Form 941 quarterly, you’ve already reported and paid these taxes. Now you’ve wound up paying the IRS twice, something no one wants to do.
This can easily happen if a family – either on their own or through a business payroll company – paid household employment taxes using Form 941 and then uses their accountant for their personal tax return. The accountant asks about any type of household employment, the family acknowledges they employed a domestic worker, and the accountant gathers the relevant information. The accountant then completes Schedule H and files it with the family’s tax return.
To avoid dual reporting, simply file Schedule H with your personal tax return at the end of the year.
Accounting issues
The IRS does allow a sole proprietor of a business or farm who also has a domestic employee to report household payroll taxes on their company’s Form 941.
However, a sole proprietor – or any business owner for that matter – can’t put a domestic worker on their business payroll. Deducting employee-related business expenses requires all employees to be direct contributors to the success of the business. The IRS has ruled domestic workers do not qualify as direct contributors. Including a domestic worker on your business payroll is considered an illegal tax deduction.
To keep it simple, it’s best to keep household payroll taxes separate from business-related taxes. File Schedule H for household and Form 941 for business.
GTM can help
Commercial payroll firms may have expertise in handling business taxes but do not have experience in dealing with household payroll and the many tax, wage, and labor nuances associated with having a domestic employee. They often treat a family with a nanny as a small business and that’s going to cause issues right from the start.
Also, accounting firms will partner with GTM to manage household payroll and taxes for their clients. While many accountants are excellent at what they do, even the most skilled ones can get tripped up by household payroll.
That’s where a firm like GTM can help. We’ve been doing household payroll and taxes for nearly 30 years and have helped tens of thousands of families. We’ve seen it all and know how to resolve tax issues and better yet, prevent them in the first place!
We can help if you’ve been mistakenly filing Form 941, dual reported, or encountered other accounting issues even if you’ve been using a commercial payroll firm or your accountant.
Call (800) 929-9213 for a free, no-obligation consultation with a household employment expert.
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