Domestic worker unemployment tax collection under 1994 legislation

U.S. Department of Labor
Employment and Training Administration
Washington, D.C. 20210

Classification: UI
Correspondence symbol: TEUMI
Issue date: March 8, 1995
Rescissions: None
Expiration date: March 31, 1996
Directive: UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 19-95
To: ALL STATE EMPLOYMENT SECURITY AGENCIES
From: MARY ANN WYRSCH, Director, Unemployment Insurance Service
Subject: Legislative Changes Affecting the Collection of Unemployment Insurance Contributions on Employers of Domestic Workers

1. Purpose. To provide State Unemployment Insurance Agencies (SESAs) with information regarding the legislation enacted by the Second Session of the 103rd Congress that permits the U.S. Secretary of the Treasury to enter into agreements with States to collect State unemployment contributions from employers of domestic workers.

2. Reference. Section 2, Public Law (P.L.) 103-387, Social Security Domestic Employment Reform Act of 1994.

3. Background. On October 22, 1994, Congress enacted P.L. 103-387 which changed the Social Security, Medicare and Federal Unemployment Tax Act (FUTA) reporting and payment requirements for employers of domestic employees. The P.L. 103-387 (also known as the "Nanny Tax Law"): (A) replaces the quarterly reporting and payment requirements of Social Security and Medicare taxes with annual reporting and payment on the employers' personal Federal income tax return; (B) raises the domestic workers' earnings threshold for reporting and paying Social Security and Medicare taxes from $50 in a quarter to $1,000 per year, retroactive to January 1, 1994; (C) exempts household employment by individuals under the age of 18 from Social Security and Medicare taxes unless household employment is the worker's principal occupation (being a student is considered an occupation for this purpose); (D) permits employers of domestic workers to report and pay FUTA taxes on the employer's personal Federal income tax return (Treasury will develop a new schedule for reporting these taxes on the 1995 Form 1040), and; (E) allows the U.S. Treasury Secretary to enter into agreements with States to collect, as the agent of the State, State unemployment contributions from employers of domestic workers by allowing individuals to pay contributions, based on wages paid to these workers, on their Federal income tax returns.

4. Current Status. No decisions have been made by the U.S. Department of Treasury concerning the details for entering into agreements with States to collect State unemployment contributions from employers of domestic workers. Discussions within Treasury currently center around whether or not such an activity is practical and/or desirable. If Treasury elects to offer States the opportunity to enter into such agreements, the States may accept or decline the offer. State law changes relative to annual vs. quarterly contribution reporting and payment requirements, as well as experience rating issues, may be necessary for States choosing to enter into such an agreement with Treasury. Federal certification, methods of transferring funds, receipt of partial tax payments, requests for extensions for filing Federal income taxes, and quarterly wage reporting requirements, are all issues that must be resolved through additional discussion and coordination with the Treasury Department, the U.S. Department of Labor, and the SESAs. The Unemployment Insurance Service is working with Treasury to resolve these issues. More information will be provided as it becomes available.

The SESAs should note that, although the earnings threshold for reporting and paying Social Security and Medicare taxes was changed from $50 per quarter to $1,000 per year, the wage requirements for determining liability for FUTA are unchanged.

5. Effective Date. Agreements between SESAs and Treasury that permit Treasury to collect State unemployment contributions from employers of domestic workers could apply to wages paid in calendar years beginning after December 31, 1994.

6. Action Required. SESA administrators are requested to provide this information to appropriate staff.

7. Inquiries. Questions regarding this issue should be directed to the appropriate ETA Regional Office.