Writing the offer for a household employee: gross or net pay, bonuses, and severance
The offer letter for a household employee is usually written quickly and read closely. It sets the pay, the hours, and the benefits, and it becomes the document everyone refers to when there is a question. It also decides most of the tax treatment. A promise of "$1,500 a week, take-home" or a bonus "at the holidays" has payroll consequences that are easier to plan before the letter is signed than to unwind after.
This post covers the tax and payroll terms in an offer to a household employee: how pay is stated, overtime, bonuses, benefits, and what happens when the job ends. It does not advise on how much to pay or how to negotiate, and it is not a contract template. Employment contracts and state wage law belong to an employment attorney. This is what your preparer and payroll provider need the offer to say clearly.
State pay in gross terms
The single most useful sentence in a household offer letter states pay as a gross amount: "Gross wages of $X per hour (or per year), before taxes and withholding." Many household employees are used to being quoted net pay, and many families are used to quoting it. A net promise means the family pays the employee's share of Social Security and Medicare, plus any income tax withholding the employee wants, on top of the quoted amount.
The cost of a net promise
For 2026, if the household agrees to cover the employee's 7.65% share of Social Security and Medicare, that payment is additional income tax wages to the employee. If the household also promises to cover income tax withholding, the gross-up compounds, because each dollar of tax paid for the employee is itself taxable. A net promise of $80,000 can cost well over $95,000 in gross wages before the employer's own 7.65% is added. Ask the payroll provider to model it before agreeing.
If you must state net pay
Write down the assumptions: the filing status and W-4 the calculation uses, and that the number will change if the employee's W-4, tax rates, or state rules change. Without that, every January rate change becomes a negotiation.
Hourly, salary, and overtime
Under federal law, most domestic service employees who do not live in the employer's home are entitled to overtime at one and a half times the regular rate for hours over 40 in a workweek, even if paid a salary. Live-in domestic employees are generally exempt from federal overtime, but many states require it. The offer should state the regular schedule, how hours are recorded, and the overtime rate.
For tax purposes, overtime is wages like any other pay. For 2025 through 2028, employees may deduct qualified overtime compensation (the premium portion required by the federal Fair Labor Standards Act) up to $12,500 a year, or $25,000 on a joint return, with a phase-out starting at $150,000 of modified AGI ($300,000 joint). Overtime paid only because state law requires it does not qualify. For 2026, the household's W-2 should show qualified overtime separately. Track the premium portion in the payroll records from the first pay period.
Bonuses
Bonuses are wages. That includes holiday bonuses, gift cards, "thank you" checks after a big event, and retention bonuses.
- Timing. A bonus paid in December 2026 is 2026 wages. A bonus paid in January 2027 is 2027 wages. If the employee is near the $184,500 Social Security wage base (rare for household staff), timing changes the tax.
- Withholding. Household employers are not required to withhold income tax unless the employee asks and the employer agrees. If you do withhold, bonuses can be withheld at the 22% supplemental rate when paid separately from regular wages.
- Written terms. State whether a bonus is discretionary or guaranteed, and how it is calculated. A guaranteed bonus is part of the pay promise.
Benefits in the letter
List each benefit and how it is paid, because the tax treatment follows the method:
- Health insurance: premiums paid directly to the insurer, or reimbursed against proof of coverage, are generally excluded from wages. A flat stipend is taxable.
- Paid time off: vacation, holidays, and sick days. Several states and cities require paid sick leave for domestic workers.
- Transit or parking: up to $340 a month each for 2026, tax free if provided as qualified benefits.
- Lodging and meals: excluded only if on your premises, for your convenience, and a condition of the job.
- Phone, car, or travel: state the business use and require a log or receipts, or the value may be taxable.
Deferred or retention pay
A promise to pay an amount in a later year, such as "a $20,000 bonus if you stay through 2028," is a deferred compensation arrangement. Section 409A applies to household employers too. A poorly drafted promise can cause the employee to owe a 20% additional tax plus interest. Keep retention promises simple and have counsel draft any payment that crosses tax years.
Pay frequency, pay statements, and raises
States set rules on how often employees must be paid and what each pay statement must show. Many require a written statement every payday listing hours, rates, gross pay, each deduction, and net pay, and some require a written notice of pay rate at hiring. These are wage law requirements, but they are also the best payroll record a household can keep, and your preparer will rely on them if a W-2 or state filing is questioned.
Raises belong in writing too. State minimum wage increases often take effect January 1, and some cities set their own. A raise effective January 1, 2027 is 2027 wages even if it was promised in 2026. When pay changes, ask the employee whether to update the Form W-4, and confirm the payroll provider has the new rate before the first pay period of the year.
When the job ends
- Final pay. States set deadlines for the final paycheck, sometimes the same day. Final pay, including accrued vacation if the state or the letter requires it, is wages.
- Severance. Severance is wages, subject to payroll tax and reported on the W-2.
- Unemployment. A former household employee may file for state unemployment benefits. The state will contact the employer of record. Having been registered and paying state unemployment tax matters here.
- References and release agreements. Those belong to counsel.
Name the employer
The letter should name who is hiring: the individual family members, the household employer under its EIN, or a business. That name should match the W-2 and the state accounts.
The scored diagnostic
Score each item 0, 1, or 2. Zero means not addressed in the offer. One means mentioned but unclear. Two means stated clearly.
| Item | 0, 1, or 2 |
|---|---|
| Pay is stated as a gross amount | |
| Net pay assumptions are written, if net was promised | |
| Schedule, timekeeping, and overtime rate are stated | |
| Bonus terms say discretionary or guaranteed | |
| Each benefit is listed with how it is paid | |
| Any deferred or retention pay was reviewed by counsel | |
| Final pay and severance terms are stated | |
| The employer (household or business) is named |
A total of 13 to 16 means the offer supports the payroll. A total of 8 to 12 means a term may cause a dispute or a tax surprise. Below 8, revise before signing.
Illustrative: a net promise and a holiday bonus
Illustrative: A family offers a house manager "$1,600 a week take-home" and a holiday bonus. The payroll provider models the gross: with the employee's Social Security, Medicare, and requested income tax withholding covered, gross wages are about $2,050 a week. The family revises the letter to state gross wages of $2,050 a week, describes the holiday bonus as discretionary, and lists health premiums paid directly to the insurer. The house manager signs a W-4 the first week. The December bonus is paid in a separate check with 22% federal withholding, and it appears on the 2026 W-2.
Who owns what
- The household: the pay decision and signing the letter.
- An employment attorney: the contract, overtime rules, and termination terms.
- Your preparer and payroll provider: gross-up modeling, withholding, and W-2 reporting.
Next step: before the next offer goes out, have your payroll provider turn any net figure into a gross figure, and put the gross figure in the letter.
Educational only. This is not tax or legal advice for your situation. Consult your own CPA, EA, or attorney before acting.
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