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Do you have a household employee? You may be liable for “nanny tax”

You’ve probably heard of the “nanny tax.” This tax could apply to you even if you don’t employ a nanny.

Other household hires may also make you liable for payroll taxes; for example your house cleaner, the gardener, a home health care worker, or other household employees (who aren’t operating as independent contractors). You aren’t required to withhold federal income tax from the household workers’ pay unless the employee requests it. In that case, ask the worker to fill out Form W-4. You may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) taxes.

Thresholds for 2022 and 2023

If your household worker earns cash wages of $2,400 in 2022 and $2,600 in 2023 (excluding the value of food and lodging) you must withhold and pay FICA taxes on all the wages (not just the excess). You also must pay FUTA tax if you pay $1,000 or more in cash Do you have a household employee? You may be liable for “nanny tax wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by you as the household employer.

If your nanny is under 18 years old and childcare is not their principal occupation, FICA taxes do not need to be withheld.  This is good news for parents…if you hire a regular babysitter, there’s no FICA reporting needed.

Both the employer and household worker may have FICA tax obligations. The employer is responsible for withholding the workers’ FICA share and must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).

You can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you provide to your employee after year end.

How to make the payments

Payments for household worker obligations are generally made by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment. Failure to do so may result in an underpayment of the estimated tax penalty.

As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on Schedule H which is prepared as part of your Form 1040 for the year.

When you report the taxes on your return, include your employer identification number (note: this is not the same as your Social Security number). Use Form SS-4 (or better yet, apply online thru to get the EIN that you will use as a household employer.

Special rule if you own a business as a sole proprietor, you should include the taxes paid for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business, using your sole proprietorship’s EIN.

Keep careful records

Keep related payroll tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, amounts and the dates of wages paid and taxes withheld, and copies of forms filed.

Contact your Wegner CPA if you need assistance or have questions about how to comply with these gnarly nanny taxes.

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