Social Security: Coverage of Household Workers - A Fact Sheet

Social Security: Coverage of Household Workers - A Fact Sheet

Order Code 94-114 EPW
Updated January 8, 2004
CRS Report for Congress
Received through the CRS Web
Social Security: Coverage of
Household Workers - A Fact Sheet
Laura Haltzel1
Domestic Social Policy Division
On October 22, 1994, President Clinton signed legislation (P.L. 103-387) that
changed Social Security coverage of household workers. Before 1994, household service
was considered covered for Social Security tax and benefit purposes if the worker was
paid $50 or more in cash in a calendar quarter. The new law changed the threshold to a
yearly amount and raised it (to $1,000 in 1994, indexed thereafter to average wage growth
— it became $1,100 in 1998, $1,200 in 2000, $1,300 in 2001, and $1,400 in 2003, where
it remains for 2004). In addition, the new law exempted most domestic workers under
age 18, and provided that Social Security and unemployment taxes will be reported on the
employer’s annual federal tax return (before 1994, taxes were paid quarterly).
Current Law. “Domestic service” generally is defined as work performed as part
of household duties that contribute to the maintenance of an employer’s residence or
administers to the personal wants and comforts of the employer. This includes work
performed by housecleaners, maids, housekeepers, babysitters, gardeners, etc. When the
service and earnings threshold requirements for such work are met, the employer must
deduct Social Security and Medicare taxes and report the wages to the Internal Revenue
Service (IRS). To do so, the employer must have an employer identification number,
which is obtained from the IRS. The amount of the Social Security and Medicare tax in
2004, for the employer and employee each, is 7.65% on wages up to $87,900. Separate
Medicare taxes of 1.45% (for the employer and the employee each) must be paid on
wages above $87,900. An employer who pays household employees $1,000 or more in
a calendar quarter must also pay the unemployment tax. Social Security and federal
unemployment taxes are reported on the employer’s annual federal tax return.
There often is confusion about whether domestic workers are employees. Many
people have the impression that domestic workers are self-employed as independent
contractors if they work in more than one household, and therefore bear the burden of
reporting and paying Social Security and other taxes. However, the tests that determine
that a household worker is self-employed are fairly difficult to meet. Generally, a person
who works in someone’s home in circumstances where the homeowner retains a measure
1 This report was written by former CRS staffer Geoffrey Kollmann.
Congressional Research Service ˜ The Library of Congress

CRS-2
of “control” — basically meaning the right to give instructions to the household worker
— is an employee.
History of Provision.
Domestic workers were first covered by the 1950
Amendments to the Social Security Act. They were covered only if they (a) earned at
least $50 in cash from an employer in a quarter, and (b) were “regularly employed,”
defined as working some portion of each of at least 24 days for an employer in a quarter.
The $50 limit was chosen because it was similar to the one that applied to employees who
work in their own homes and because it then was the amount a worker needed to earn to
receive a “quarter of coverage” (QC) — a certain number of which are necessary to be
eligible for benefits. In 1954, Congress eliminated the 24-day rule. In 1977, Congress
changed the rules regarding eligibility for earning a QC, replacing the $50-per-quarter rule
with one that granted a QC for every $250 of annual earnings (the $250 threshold was
indexed to change annually thereafter in proportion to the growth in average wages in the
economy — in 2004, it is $900). However, Congress left in place the $50-per-quarter test
for coverage of domestic workers.
Recent Legislation and New Law. In early 1993, the issue of coverage of
domestic workers burst into public awareness when several Cabinet nominees revealed
that they had failed to report the wages they had paid to childcare providers. Subsequent
media scrutiny made it apparent that under-reporting of household wages was common.
It also highlighted that householders were supposed to be reporting even occasional work
such as babysitting and lawn mowing. As the threshold had not been changed for 43
years, the question naturally arose of whether it should be raised.
Several measures were introduced in the 103rd Congress that would have raised the
threshold by varying amounts. On March 22, 1994, Representative Andrew Jacobs
introduced H.R. 4105, which would have raised the threshold to $1,250 a year in 1995,
to be indexed thereafter to increases in average wages. This measure was included in
H.R. 4278, approved by the House on May 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 in 1994. Workers and
their employers who paid the tax on earnings of less than $1,000 in 1994 received a
refund, but there was no loss of wage credits for the earnings. The measure also provided
that the threshold would rise in the future, in $100 increments, in proportion to the growth
in average wages in the economy (it rose to $1,100 in 1998, $1,200 in 2000, $1,300 in
2001, and $1,400 in 2003, where it remains for 2004). Domestic workers under age 18
are exempt except when they are regularly employed in a job that is their principal
occupation. Persons employing household workers will report Social Security and federal
unemployment taxes on their annual federal tax returns. Beginning in 1998, employers
of domestic workers earning more than the threshold have to make estimated quarterly
tax payments in order to avoid a tax penalty. The conference report was approved in the
House by a vote of 423-0, and in the Senate by unanimous consent, on October 6, 1994.
President Clinton signed it into law (P.L. 103-387) on October 22, 1994.