Do I need to pay taxes such as Social Security and Medicare for my home health care people?

IF you pay cash wages of $1,900 or more in 2014, then-

You must withhold and pay social security and Medicare taxes. The combined total rate is 15.3% of total cash wages. You would deduct 7.65% (half) of this amount from the employee’s pay and you (the employer) pay the other 7.65%.

IF you pay cash wages of $1,000 or more during any one quarter of the calendar year, then-

You must pay Federal Unemployment Tax for the first $7,000 of wages paid each year. The tax rate is 6%, so $420 is the most you would pay per year. This is your expense as the employer and not deducted from employee pay.

Many states also have unemployment tax requirements.

That’s the bad news, here’s the good part…

You CAN deduct all medical expenses that exceed 7.5% of your AGI (Adjusted Gross Income). If your AGI is $50,000, you can deduct all medical expenses over $3,750. That includes all out-of-pocket expenses for medical bills including copays and deductibles, prescriptions and even mileage to and from medical appointments. You can also deduct the wages you pay to home health care workers AND any expenses associated with those wages. For example, if you paid someone $20 per hour for 40 hours per week, that would be $800 per week. If that person works 50 weeks per year, that’s $40,000. You would also pay around $3,060 in Medicare/SS taxes and $420 in FUTA (Federal Unemployment Tax) for another $3,480 (let’s say $3,500 to make it simpler). You can deduct $43,500 minus $3,750 (7.5% of your AGI) which would be $39,750 in deductible expenses! Then you can deduct all your other medical and dental expenses as well.

If you pay an employee in cash and do not pay Medicare, SS and FUTA on the wages, none of it would be deductible! It’s quite possible that you might save money by paying the required taxes on the wages and being able to deduct the wages and related tax expenses from your tax return!

It’s also important to know that the employee can’t file for Unemployment benefits based on any wages paid in cash and not taxed. Any non-reported (“under the table”) wages also will not be counted toward his/her future Social Security benefits and/or Medicare premiums.

In my experience, the vast majority of people such as home health care aides or nurses want to be paid “under the table”. If you pay Medicare/SS/FUTA taxes, it would cost them 7.65% of their pay (employee’s half of Medicare/SS) AND they would also be required to pay Federal and State Income Tax on their pay. Combined, their ‘take home’ pay would be reduced by about 25% when Income Taxes are factored in. It’s very possible that your employee may request (or require) a higher rate of pay to compensate.

I want to make it CLEAR- I am NOT encouraging anyone to ignore or violate any tax or employment laws. Legally, you are expected to pay Medicare, SS and FUTA and report the wages paid each year to the IRS. Because you can deduct the full wages plus expenses, it could reduce your income tax liability substantially. BUT your existing employee who is being paid in non-reported cash wages will not be happy with the change because it will cost them about 25% of their current wages!

If I were you, I would discuss the situation with the employee and possibly consider increasing her hourly pay by 15-20% to offset most of the amount they would be losing. If you aren’t willing to increase the pay rate, you may need to find a new person to hire and make it clear that you won’t be paying them “under the table”’ and you will be deducting SS/Medicare plus they will be required to pay Federal and State Income Tax on their earnings.

If you continue to pay cash wages ‘under the table’ without paying SS/Medicare/FUTA and reporting the wages paid for income tax purposes, will you be caught? It’s highly unlikely. Millions of home employees work for cash but it’s simply not cost-effective for the IRS to invest time and manpower to pursue the relatively small amounts that are owed. But it also doesn’t seem fair that these home employees aren’t paying a penny in Federal or State Income Taxes but the rest of us are! =)

If I can answer any related questions, please don’t hesitate to let me know and I’ll do my best! If I don’t know an answer, I can usually get one for most tax and accounting questions! =)

Thank you, IGOZOOM. You answer was VERY helpful and complete! And thanks for offering to help in the future.

Here's a list that I created a few months ago for a friend who is planning to deduct medical expenses this year. I thought you might find it useful if you decide to go that route-

Dental – cost of cleanings, fillings, root canals, crowns, bridges, implants, dentures, extractions…just no procedures or expenses for cosmetic reasons only (whitening, veneers)
Vision- Eye exams, glasses, contact lenses and any cleaning supplies, even Lasik surgery

Ambulance
Chiropractor
Insurance Premiums paid for policies that cover medical, dental or vision care
Premiums for Medicare Part B, Part D and/or Medigap coverage
Prescription Drug costs
In-home caregiver services
Mileage for medical reasons ($0.24/mile currently), plus parking costs
Purchase of prescribed medical equipment (wheelchair, hospital bed, etc.)
Copays, deductibles or any out-of-pocket costs for medical treatment

I previously posted that you could deduct any medical expenses over 7.5% of your AGI. That is true if at least one of you (you or your husband) is age 65 or older. Under age 65, you can only deduct medical expenses over 10% of your AGI.

I took a look at the Unemployment Tax laws in South Carolina for you. From all the information I saw, you should not have to pay state unemployment taxes for an in-home caregiver or nursing employee. Just to be safe, I would double check with a local accountant or tax attorney in your area.

I also wanted to say that I am very sorry that your situation wasn’t short-term as you had hoped and expected. I wish you and your husband the best!

Thanks again, IgoZoom. Appreciate all the info you're giving me!

Another question(s) for IgoZoom: May I pay these taxes retroactively on wages I've already paid? Do the health care companies pay these taxes if you hire through them ?

If you hire through a health care company or agency, the person is their employee and they are responsible for all tax-related filings and payments. Of course, this will be reflected in the hourly rate they charge versus what you pay someone you hired independently.

im a stone mason and i hire a helper from time to time. i simply send a mix of money each week to both the state and fed with their ssn on the check and 1099 them at end of year. occasionally ill toss in a scribbled note to them explaining that a kid needed work, i needed help. i know it isnt fully lawful but im a stone mason, not a book keeper. ive never had a problem from the irs and have actually had small amounts forgiven from time to time. its just common sense -- send em some money. they like money - they dont care where it comes from..

Do I need some special liability insurance to cover my privately hired health care workers in case of injury while in my home? I have home owners insurance and an umbrella policy.

If you are a daughter and take care of your mother that is of age and need assistance, are they supposed to take out Social Security, Medical and unemployment taxes from your check from the state of california if they are paying for in home services?