A very frequent question we are asked is why our service supports using Quarterly Form 941 (with monthly tax deposits) to pay Household Employees rather than Schedule H (with quarterly estimated tax payments squared away at the end of the year with your income tax return Form 1040).
It is true that Schedule H is the most commonly used method to pay Household Employees. And if you peruse IRS Publication 926, here at https://www.irs.gov/publications/p926/ar02.html, you will find you are first directed toward toward filing Schedule H and making quarterly estimated tax deposits. However, another option outlined in Publication 926 is an option for “Business” employers to file Quarterly Form 941 with monthly tax deposits. I put “Business” in quotes for this reason. There is no prohibition against paying taxes on a business schedule using the forms a business uses and declaring a business solely for the purpose of paying a household employee. And being super clear here, paying a household employee as a “business” using Form 941 in no way identifies you as a business in other respects to the IRS. For example they will not look for Schedule C with your income tax return when you file your 1040 income taxes. They will not look for business revenue. Using Form 941 only marks you as a business for the way you pay your employment taxes and the frequency and nothing else.
So why would you prefer to file and pay taxes using Form 941 instead of the more commonly used Schedule H? Lets go back in time when Schedule H was first implemented. There was no electronic filing or payment system at that time. If you wanted to file and pay using form 941 you did so with paper forms and made payments using paper coupons that needed to be mailed to various different federal and state tax agencies. At that time, the idea of calculating and sending in a quarterly estimated tax payment and squaring it away on your annual tax return, Form 1040 using Schedule H was an improvement. But things have changed and the thinking about which method is most employer-friendly has not kept up. Currently all Federal Form 941 filing can be done electronically with monthly tax deposits also electronic. Most states (and all states covered by our service) allow this as well. Software pioneers like Intuit have made it extremely easy to file and pay federal and state taxes with a few mouse clicks. It is our opinion that the balance has shifted and that using form 941 has become the best and easiest method of filing and paying Household Employee taxes. Aside from the simplicity that you can receive an email with a link and file and pay with a few clicks, it offers the advantage that with your monthly tax deposits your taxes are paid in full, as you go. There are no year-end surprises that you have paid too little or too much using Form 1040-ES, no squaring away with another form on your income tax return, Schedule H. Having no nexus with your income tax return makes one less burden at tax time. Using Form 941 and making monthly tax deposits (actual not estimated taxes) gives you the peace of mind that your taxes are paid in full as you go.
Therefore we do not offer Schedule H as an option. We have thousands of clients who have and continue to use our service using Form 941 instead. Either way works depending on your needs. The important thing to know here is to not use both methods in the same year. This will cause problems as you would pay your taxes twice and run into issues with the Social Security Administration. We do remind our clients that if they are paying and filing using our service that they must be careful not to accidently file Schedule H with their income tax return.
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