Social Security: Coverage of Household Workers - A Fact Sheet

CRS Report for Congress
Received through the CRS W eb
Social Security: Coverage o f
Household Workers - A F act Sheet
Laura H altzel 1
Domestic Social Policy Division
On October 22, 1994, President C l i nton sign ed legi slation (P.L. 103-387) that
changed S ocial S ecurity coverage of household workers. Before 1994, household s ervice
was consi d er e d c o v e r e d for S o ci al S ecuri t y tax and benefit purposes if the worker was
paid $50 or more in cash i n a calendar quarter . T he new l aw changed t he threshold t o a
yearl y amount and raised i t (to $1,000 in 1994, index ed t hereafter t o average wage growth
— i t b ecame $1,100 in 1998, $1,200 in 2000, $1,300 in 2001, and $1,400 in 2003, where
i t r e m a i n s for 2004). In addition, the new law ex empted m ost domestic workers und er
age 18, and p rovided t hat S ocial S ecurity an d unemploym ent t ax es will be reported o n t he
employer’s annual federal tax return (before 1994, tax es were p aid quarterly).
Current Law . “Domes tic service” generally is defined as w ork p erformed as part
of household duties t hat contribute t o t he maintenance o f a n e m p l o ye r’s residence o r
administers to the personal wants and comfo rts o f t he employer. This i ncludes work
performed by housecleaners, maids, housekeepers, babysitters, gardeners, etc. W hen t he
service and earnings t hreshold requirement s for such work ar e m e t , t he employer must
deduct S oci al S ecuri t y and M edi care t ax es and report t he wages t o t he In t ernal R evenue
Service ( IR S ) . T o do s o, the employer m ust have an employer i dentification number,
which i s obtained from t he IR S. The amount of the S ocial S ecurity and M edicare t ax in
2004, for t he employer and employee each, i s 7.65% on wages u p t o $87,900. S eparate
Medicare t ax es of 1.45% (for t he employer and t h e e m p l o yee each) m ust b e p aid o n
wages above $87,900. An employer who p ays household employees $1,000 or more in
a cal endar quart er m u st al so pay t he unem p l o ym ent t ax . S oci al S ecuri t y an d f e d e r a l
unemploym ent t ax es are reported o n t he employer’s annual federal tax return.
There o ften is confusion about whethe r d o m estic workers are employees. M any
people h a v e t he impression that domestic wo rkers are self-employed as i ndependent
contractors i f t hey work i n m ore t han one household, and t herefore bear the bur d e n o f
reporting and payi ng Soci al Security and other tax es. However, the t es ts that determine
that a household worker i s s elf-employed are fa irly difficult to meet. Generally, a person
who works in someone’s home i n circumstances where t he hom eowner ret ai n s a m easure
1 This report was wr itten by f ormer CRS staffer Geoffrey K ollmann.
Congressional Research Service ˜ The Library of Congress
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of “control” — b asically meaning t he righ t to give i nstructions to the household worker
— i s an employee.
History of P r ovi sion. Domestic workers were first covered b y t he 1950
Amendments to the S ocial S ecurity Act. They were covered only i f t hey (a) earned at
l eas t $ 50 in cas h from an employer i n a quarter, and (b) were “regularly emplo ye d , ”
defi ned as worki ng som e port i o n o f each of at l east 2 4 d ays for an em pl oyer i n a quart er.
The $50 limit was chosen because it was s imilar t o t he one that applied t o employees who
work in their o wn homes and b ecause it then was t he amount a worker n eeded to earn t o
r eceive a “quart er of coverage” (QC) — a certain number o f which are n ecessary to be
el i g i b le for b enefits. In 1954, Congress eliminated the 24-day rule. In 1977, Congres s
changed t he rules regarding eligibility for earning a QC, replacing the $50-per-quarter rule
wit h o n e that granted a QC for every $250 of annual earnings (the $250 threshold was
index ed t o change annually thereafter i n p roportion t o t he growth in average wages in the
economy — in 2004, it is $900). However, C ongress left in place the $50-per-quarter test
for coverage of domestic workers.
Recent Legislation and New La w . In early 1993, the i ssue o f coverage of
dom est i c workers burst i n t o publ i c awareness when s everal C abi net nom i n ees reveal ed
that they had failed t o report t he wages t he y h ad paid to childcare p roviders. S ubsequent
media s crutiny m ade i t apparent that under-reporting o f household wages was common.
It also high lighted that householders were supposed to be reporting even o ccasional work
such as babysitting and lawn mowing. As t he thres h o l d had not been changed for 43
years, the question n aturally arose o f whether it should b e raised.
Several m easures were introduced in the 103 rd Congress that would h ave raised t he
threshold b y v aryi ng amounts. On March 22, 1994, Representati v e Andrew J acobs
introduced H.R. 4105, which would h ave raised t he threshold t o $1,250 a year in 1995,
t o be i ndex ed t hereaft er t o i ncreases i n average w ages. T hi s m easure w a s i n cl uded i n
H.R. 4278, approved b y t he House o n M ay 12, 1994.
On October 5, 1994, conferees agreed to a measure that raised the threshold for
Social Security coverage of household workers to $1,000, effective i n 1994. W o rkers and
t h eir employers who p aid t he tax o n earnings o f l ess t han $1,000 in 1994 rec e i v e d a
refund, but there was no loss of wage credits for t he earnings. The m easure also p rovided
that the t hreshold would rise i n t he future, i n $100 increments, i n p roportion t o t he growth
in average wages in the economy (it r o s e t o $ 1,100 in 1998, $1,200 in 2000, $1,300 in
2001, and $1,400 in 2003, where i t remains for 2004). Domestic workers under age 18
are ex empt ex cept when t hey are regularly employed i n a jo b t h a t i s t h eir princi pal
occupation. Pers ons employing household workers will report S ocial S ecurity and federal
unemploym ent t ax es on their annual federal tax returns. Beginning in 1998, employers
of domes tic workers earning more than the t hres hold have t o m ake estimated quarterly
tax payments i n order to avoid a tax penalty. T he conference report was approved i n t he
House b y a vote o f 423-0, and i n t he Senate by unanimous consent, on October 6 , 1994.
President C linton s igned i t i nto l aw (P.L. 103-387) on October 22, 1994.
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