Instructions For Schedule H (Form 1040) Household Employment Taxes - 2005 Page 6

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What Is the Earned Income Credit
You Should Also Know
(EIC)?
The EIC is a refundable tax credit for certain workers.
What’s New for 2006
You must notify
Which employees must I notify about the EIC?
The tax rates mentioned in the instructions for Parts I
your household employee about the EIC if you agreed to withhold
and II of Schedule H will not change. However, the cash
TIP
federal income tax from the employee’s wages but did not do so
wage threshold that you pay to any one household em-
because the income tax withholding tables showed that no tax
ployee increases to $1,500 for 2006. The 2006 Em-
should be withheld.
ployee Social Security and Medicare Tax Withholding Table is in
Note.
You are encouraged to notify each employee whose wages
Publication 926, Household Employer’s Tax Guide.
for 2005 were less than $35,263 ($37,263 if married filing jointly)
Limit on Wages Subject to Social Security Tax.
The $90,000
that he or she may be eligible for the EIC.
amount in the instructions for Part I of Schedule H will increase to
You must give the
How and when must I notify my employees?
$94,200.
employee one of the following:
The official IRS Form W-2, that has the required information
Estimated Tax Penalty
about the EIC on the back of Copy B.
A substitute Form W-2 with the same EIC information on the
You may need to increase the federal income tax withheld from
back of the employee’s copy that is on Copy B of the official IRS
your pay, pension, annuity, etc. or pay estimated tax payments to
Form W-2.
avoid an estimated tax penalty based on your household employ-
Notice 797, Possible Federal Tax Refund Due to the Earned
ment taxes shown on line 27 of Schedule H (Form 1040). You may
Income Credit (EIC).
increase your federal income tax withheld by filing a new Form
W-4, Employee’s Withholding Allowance Certificate, or Form
Your written statement with the same wording as Notice 797.
W-4P, Withholding Certificate for Pension or Annuity Payments.
If you are not required to give the employee a Form W-2, you
Make estimated tax payments by filing Form 1040-ES, Estimated
must provide the notification by February 7, 2006.
Tax for Individuals. For more information, see Publication 505, Tax
You must hand the notice directly to the employee or send it by
Withholding and Estimated Tax.
First-Class Mail to the employee’s last known address.
Estimated tax payments must be made during the tax
Eligible employees claim
How do my employees claim the EIC?
year that the tax liability is incurred.
!
the EIC on their 2005 tax returns.
CAUTION
How do my employees get advance EIC payments?
Eligible em-
ployees who have a qualifying child can get part of the credit with
You will not be penalized for failure to make estimated
Exception.
their pay during the year by giving you a completed Form W-5. You
tax payments if both 1 and 2 below apply for the year.
must include advance EIC payments with wages paid to these
1. You will not have federal income tax withheld from wages,
employees. For details, including tables that show you how to
pensions, or any other payments you receive.
figure the amount to add to the employee’s net pay, see Publication
2. Your income taxes, excluding your household employment
15 (Circular E), Employer’s Tax Guide.
taxes, would not be enough to require payment of estimated taxes.
Rules For Business Employers
What Records To Keep
Do not use Schedule H if you chose to report employment taxes for
your household employees along with your other employees on
You must keep copies of Schedule H and related Forms W-2, W-3,
Form 941, Employer’s Quarterly Federal Tax Return, or Form 943,
W-4, and W-5, Earned Income Credit Advance Payment Certifi-
Employer’s Annual Federal Tax Return for Agricultural Employ-
cate, for at least 4 years after the due date for filing Schedule H or
ees. If you report this way, be sure to include your household
the date the taxes were paid, whichever is later. If you have to file
employees’ wages on your Form 940 (or Form 940-EZ),
Form W-2, also keep a record of each employee’s name and social
Employer’s Annual Federal Unemployment (FUTA) Tax Return.
security number. Each payday, you should record the dates and
amounts of:
Cash and noncash wage payments.
State Disability Payments
Any employee social security tax withheld.
Certain state disability plan payments to household employees are
Any employee Medicare tax withheld.
treated as wages subject to social security and Medicare taxes. If
Any federal income tax withheld.
your employee received payments from a plan that withheld the
Any advance EIC payments you made.
employee’s share of social security and Medicare taxes, include the
H-6

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