Do you employ a nanny, housekeeper, gardener, or other household employee who isn’t an independent contractor?

If so, you may be liable for federal income and other taxes, as well as additional state tax obligations, colloquially known as the “nanny tax.”

When employing a household worker you are not required to withhold federal income taxes from pay, but many people still choose to withhold at the request of their employees. If this is how your household is choosing to handle federal income taxes, you should ask your employee to fill out a Form W-4. Additionally, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax if you reach certain thresholds.

Threshold Set to Rise in 2024

For 2023, the threshold for withholding and paying FICA taxes was a cash wage of $2,600 or more per household employee (certain exclusions apply to food and lodging).  If the threshold is met, all wages, not just the excess are subject to FICA. In 2024, the threshold will increase by $100 to $2,700 for all household workers.

However, there is a common exception to this rule.  In cases where the nanny is under 18 and childcare isn’t their principal occupation, no FICA withholding is required. For example, employing a high school student part-time as a babysitter would not result in FICA liability, even if they met the $2,700 threshold.

The employer is not the only person liable for withholding FICA. The household worker may be liable as well.  As the employer, you are responsible for withholding your workers’ FICA share. Additionally, you must contribute a matching amount. The total amount of FICA tax is split between Social Security (rate of 6.2 % for both the employer and employee) and Medicare (rate of 1.45% for both the employer and employee).

You can pay the worker’s portion of Social Security and Medicare taxes. Don’t worry, if you opt to pay their portion, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, be aware that the payments will be treated as additional income to the worker for federal purposes, meaning you must include them as wages on the W-2 provided by you to the employee.

FUTA must be paid if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. It applies to the first $7,000 of wages and is only paid out by the employer.

Filing and Settling

There are two common ways you can approach paying your household worker obligations:

• Option one: You can increase your quarterly estimated tax payments
• Option two: You can increase withholdings from payments.

These strategies are typically seen as preferential to an annual lump sum payment.

If you are an employer of a household worker, employment tax returns are not required to be filed, even in cases where you are required to withhold or pay tax (unless you own your own business).  Employment taxes are reported on your tax return on Schedule H. When reporting taxes on Schedule H, include your Employer Identification Number (EIN), which is separate from your SSN. To get an EIN you must file Form SS-4.

If you own a business as a sole proprietor, you include taxes paid for household workers on the FUTA and FICA forms you file with your business. Your sole proprietor EIN should be used to report these taxes.

Detailed Record Keeping is Key

It is important to keep related tax records for at least four years from the due date of the return or the date that the tax was paid. These records should include the worker’s address, social security number, employment dates, dates and amount of wages paid and withheld, and copies or forms filed.