Although most people who hire household staff would still prefer not being troubled by the nuisance of figuring out the taxes and paying the extra amounts necessary to hire a nanny our housekeeper, there are a number of converts who understand the importance of doing so.

If you are a household employer who is still unsure about the process, consider the following:

What is a Household Employer? A household employer is defined as someone who pays an individual $1,500 or more in a calendar quarter to perform duties in or around their home on a regular basis.

An example of a household employee would be a nanny, housekeeper, cook, home health aide and a private nurse, to name a few. The other important issue is how much control you as the employer have over the employee from a management standpoint. For example: if you determine the work hours, where the employee works, and what their responsibilities are, you would be considered a household employer.

On the other hand, an employee can be considered an independent contractor if this person has an office elsewhere, comes to work with tools (cleaning equipment, etc.), and works unsupervised for many different people. Now that you have determined that your employee is not an independent contractor and you are a household employer, what does this mean?

As an employer of a household employee, you are responsible for withholding taxes and remitting them to the tax agencies throughout the year. Your employee's wages fall under the Federal Insurance Contribution Act (FICA), so a portion of the wages you pay must be withheld and paid as Social Security and Medicare taxes. Both you and your employee are required to pay a percentage (7.65%) of the employee's gross wages. If you want to pay the entire amount yourself, you can do so and list the employee's share as n additional taxable gross income.

In addition, there are State and Federal Income taxes that may or may not be withheld depending on the agreement between you and the employee. If you do withhold these taxes, you need to refer to your state's withholding guidelines.

You will also need to pay Federal and State Unemployment Tax. What are the advantages to doing payroll taxes on my household employee aside from the fact that it is a legal requirement by law?

There are a few advantages to doing the right thing.

First of all, you can pay your employee with pre-tax funds through a Dependent Care Assistance Plan (DCAP) that is a tax-exempt fund that your employer would offer as a benefit. This plan allows you to contribute up to $5,000 of your pre-tax earnings to an individual Dependent Care Account. The money in this account is then used to cover dependent care expenses free of taxes.

For those who do not have access to a Dependent Care Account, you may claim a tax credit for Child or Dependent Care on your income tax return at the end of the year.

You can take a tax credit of 20% to 35% of qualifying childcare expenses up to $3,000 for one dependent or up to $6,000 for two or more dependents. (Only one of these tax savings options may be used each year.) Keep in mind that you cannot take advantage of any of this unless you can prove that you have an employee on payroll.

So now that you more or less understand what is required of you as an employer of a household employee, where can you turn to have someone do this tedious task of payroll taxes for you?

There are a number of companies who do this type of payroll tax service, but only a few companies specialize in the "nanny payroll tax". They make this part of being a household employer - simple and hassle-free.