You don't have to withhold income tax from your employee's wages, but you can if the employee requests that you do so. Although that might sound like a hassle, it's not that much trouble.
If you decide to withhold, you'll need to get a completed W-4 form, Employee's Withholding Allowance Certificate, from your employee. You'll also need a copy of IRS Publication 15, Circular E, Employer's Tax Guide, which explains how to figure the amount withheld based on the employee's income and the information on the W-4. (You can find it at www.irs.gov.)
Note that the amount on which you withhold income tax may be different from the amount subject to the Social Security tax. For income tax purposes, you generally must count the value of food, lodging, clothing or other non-cash items provided to an employee, as well as cash wages paid. However, the value of food and lodging provided in your home and for your convenience is not considered income. This exception generally exempts from the income tax the value of food and lodging that you provide to a household employee who lives in your home.
If your employee earns less than about $32,001 a year, he or she may be eligible for a special tax break: the earned-income credit. You should give the worker a copy of IRS Notice 797, Notice of a Possible Federal Tax Refund Due to the Earned Income Credit, which is available from the IRS. The employee can give you a W-5 form, the Earned Income Credit Advance Payment Certificate, which requires you to pay the credit in installments each payday. The money comes out of the taxes you would otherwise send to the IRS.
As an employer, you also have the responsibility to give your employee a W-2 form showing compensation paid during the year and how much tax was withheld. By January 31, you are required to give a completed W-2 to your employee for the previous year. Copies of the form must be filed with the Social Security Administration by the end of February.
This is yet another tax you may face if you hire household help. FUTA pays for your employee's unemployment insurance. As the employer, you are subject to the tax if you paid wages of $1,000 or more in any calendar quarter during the current or preceding year. Note that paying less than $1,000 during a quarter does not necessarily exempt you from FUTA on those wages. It still applies if you paid wages of $1,000 or more during any quarter of the current or previous year. (FUTA does not apply to wages paid to your spouse, parents or children under age 21.)
The FUTA tax is 6.2% of the first $7,000 of cash wages paid during the calendar year, but you'll probably pay just 0.8% after a credit for paying your state's unemployment tax. When you hire a household employee, contact your state's employment-tax office for information on paying the state's tax and getting the reporting number you'll need to get federal credit for the state tax paid. Unlike the Social Security tax, this levy must be paid entirely by the employer. You can't withhold part of it from your employee.
Like social security taxes, the FUTA tax is paid on Schedule H that goes along with your regular Form 1040.