What is a nanny tax, and how does it affect me?
If you hire a nanny, get ready for a big revelation — you may be considered a household employer in the eyes of the IRS. What that means is you are responsible for paying and withholding what’s commonly called “nanny tax,” which covers federal Social Security, Medicare, and unemployment taxes.
Essentially, it’s the federal income taxes families pay for household employees who make a certain amount of money.
Getting your arms around nanny tax rules is essential for both the employer and the nanny. Read on as we detail what you need to know and do from a tax standpoint.
Why bother with nanny tax? Benefits for all in household employment
Believe it or not, it’s in both parties’ favor to report nanny taxes:
- The employee benefits from having employment on record. If you apply for a loan, want to buy a home, lease a car, rent an apartment, or get a new credit card, it’s crucial to have a legitimate job on the record. In addition, the employee can access long-term benefits like unemployment benefits, Social Security income, Medicare, and potentially even affordable and subsidized health insurance costs through the Affordable Care Act.
- The household employer benefits from a tax standpoint, too. Because you’re paying for child care you’re eligible for the Child Care Tax Credit, which is valued at as high as 35% of $3,000 in qualifying expenses for one kid and $6,000 for two or more kids. In most cases, you can also use your Flexible Spending Accounts (FSAs) to cover the childcare expenses associated with the household employee. Generally, paying families can use up to $5,000 in pre-tax dollars towards this expense.
What is a household employee?
Calling your nanny a household worker or even employee might seem overly formal. But in the eyes of the IRS there is a technical definition and not all nannies are considered household employees. Here’s a summary:
These caregivers offer their services to the public and tend to have many families in their care. Generally, they provide in-home care versus working in your home. If they come to your home, they bring their own supplies and goods — and are responsible for selecting when they work.
The IRS definition states that you, the employer, dictate what work is to be done, how it’s done, and when. For instance, if your nanny adheres to a specific schedule each week, you generally dictate the rules of how their household work should be performed, and you pay them more than $2,400 per calendar year, they’re considered a household employee, regardless of if they work part- or full-time. What else affects who qualifies? The caregiver’s age and familial relation can impact nanny tax qualification. (That’s because family members and anyone under 18 don’t qualify as household employees.)
What are the nanny’s tax responsibilities?
Nannies need to take care of a few tax responsibilities as part of their household employment, but it will be different depending on their official tax status.
As noted above, a nanny or caregiver may be:
- An independent contractor (these nannies are considered self-employed vs. an employee)
- Or a household employee
What independent contractors need to do
If you don’t meet the household employee definition, you’re an independent contractor. In that case, you’ll receive 1099s and possibly 1099-Ks (if paid digitally) throughout the year. As an independent contractor, you’re responsible for paying self-employment taxes. To keep current on required taxes, many contractors pay estimated taxes throughout the year. Learn more about taxes for independent contractors.
What household employees need to do
Nannies should complete different tax forms than independent contractors, many of which need to be completed before starting the job.
- Provide a completed Form I-9 to your household employer to ensure you’re qualified to work in the U.S.
- Provide a completed W-4 form and state income tax withholding forms. Accurately complete your name, address, and Social Security or ITIN to your household employer. (Resource: Here’s how to fill out a W-4 form.)
Household employer: What are the family’s tax responsibilities for paying nanny tax?
- Tax withholding. As a household employer, you’ll take out federal and income state taxes, FICA, and unemployment taxes from each paycheck.
- FICA taxes. As a household employer, you’re responsible for remitting your and the nanny’s share of the Social Security and Medicare taxes (7.65%). You can calculate nanny taxes by taking 15.3% of the employee’s gross pay. This covers the household employee’s portion of Medicare and Social Security payments. Families who paid household work professionals should pay their federal income taxes by April 15. You have the option of splitting up the payments as an independent contractor would by paying estimated taxes each quarter to cover the additional taxes and avoid underpayment penalties. Or, change your family’s federal income tax withholding to account for the additional taxes.
- Unemployment taxes. As a household employer, you should also pay federal unemployment tax on the first $7,000 of wages. The federal unemployment tax rate is 6%, but many employers get a 5.4% credit against the tax. Parents may also need to pay state unemployment taxes. (Check with your state’s department of revenue about this amount.) Form W-2 with the IRS for each employee and give each employee a copy. At a similar time, file Form W-3 to the Social Security Administration.
So, now that you know the basics of nanny tax, it’s time to share details about how to take care of paying nanny tax and other associated tasks.
- Apply for a Tax ID number: As an employer, you’ll need a Federal Employer Identification Number (FEIN) to send to the IRS and your state tax agency. Luckily, applying is pretty straightforward – all you need to do is get the number from IRS.gov. (Think of it as a Social Security number for an employer.)
- Give your nanny a W-4: Before they start working for you, give your nanny a W-4 to complete. This form corresponds with the W-2, a wage statement. The W-2 is one of the most common ones to file, and for a reason. It communicates to the appropriate agencies that you’re withholding FICA tax for your nanny and will remit FICA tax payments throughout the tax year.
- Run payroll: Accurately determine your household employee’s gross pay, then subtract the appropriate taxes withheld for each pay period.
- Stay up on taxes year-round: Depending on the state you reside in, you might need to file state taxes monthly, quarterly, or annually. In addition, you’ll need to file federal taxes, including: Social Security and Medicare taxes, Federal unemployment tax, and Federal income withholding tax.
- Complete yearly tax forms: Prepare and file a Schedule H to calculate federal employment taxes with your personal federal tax return. Your state might require a separate document that summarizes your nanny’s withholdings. Also, you should file your nanny’s Form W-2 with the IRS for each employee and give each employee a copy. At a similar time, file Form W-3 to the Social Security Administration.
What happens if you don’t pay nanny taxes?
If your family has what the IRS considers a household employee and don’t withhold federal income tax (what’s commonly called paying someone under the table), they could incur a tax penalty and will have to pay back taxes (for Medicare, Social Security, and unemployment taxes). In the worst-case scenario, the household employer would be charged with tax evasion.
While this is highly unlikely, rest your mind at ease by getting professional tax guidance. And if you’re a nanny or household employee, be proactive! Tell your employing family that you want to withhold federal and state income tax on your earnings.
Nannies and families: Get help from H&R Block to file your taxes
With the many tax laws associated with nanny taxes, it could benefit you to consult a tax professional to keep up with your tax obligations. If you’re still questioning how to do nanny taxes as an employee or employer, H&R Block can help. Learn about the many ways to file.
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