The “nanny tax” applies to more than just nannies. Hiring a babysitter, gardener or another household employee (who isn’t an independent contractor) may result in a “nanny tax” tax obligation. The IRS considers you an employer for a nanny that you hired for your kids. The rationale behind treating Nanny or Caregivers as your employee is that the Individual/family who hired them has the right to tell the caregivers what needs to be done. This job contract fulfills the employer-employee relationship between them. So, the onerous IRS rules for payroll tax withholding and social security/Medicare employment taxes withholding laws also apply to you.
Do you need to pay employment taxes?
If you pay cash wages of $2,100 or more in 2019 to a household employee, all the wages up to $132,900 are subject to FICA taxes. Cash wages do not include the value of food and lodging. If you pay wages to a nanny or household worker that is under 18 and childcare is not his or her principal occupation, you are not required to withhold FICA taxes.
Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. You must also 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 both the employer and worker (2.9% total). You can either withhold your worker’s share from the worker’s wages or you can pay the worker’s share of Social Security and Medicare taxes. If you do decide to pay for the worker’s share of employment taxes out of your own pocket, your payments are not counted as additional cash wages for Social Security and Medicare purposes. Your payments are treated as additional income to the worker for federal tax purposes and you must include them as wages on the W-2 form that you must provide.
You are not required to withhold federal income taxes if you employ a household worker, but you may choose to do so if the worker requests it. In the event that you agree to withhold federal taxes for your household employee, make sure you have the worker fill out a Form W-4. You may also be required to pay federal unemployment (FUTA) tax. FUTA tax must also be paid if you pay $1,000 or more in cash wages to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.
How do you make tax payments and report the nanny’s employment tax?
As a household worker employer, you do not have to file quarterly employment tax returns, even if you are required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your personal tax return on Schedule H. You would pay for the household worker obligations by increasing your quarterly estimated tax payments or by increasing withholding from wages, rather than making an annual lump-sum payment.
When reporting the taxes on your tax return, you will need to include your employer identification number (this is not the same as your social security number). You must file Form SS-4 to obtain an employer identification number (EIN). AN EIN can also be obtained online at the IRS website. With that said, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business.
Keep related employment tax records for at least 4 years after the due date of the return or the date the tax was paid, whichever is later. Your records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and all copies of forms filed.
When is the Nanny Tax Not Payable?
You don’t need to pay Nanny Tax in the following circumstances:
- If you take your kids to a daycare center or to someone’s house, you don’t have to pay nanny tax because, in such cases, the childcare workers may be employees of the daycare center, independent contractors or part of another type of business.
- Your child is cared for by your relatives like a spouse, your child under age 21, your parent, or any child under 18, and you pay them for caregiving service.
- You are paying to a high school student for Nanny or babysitter services.
Please reach out to your Wegner CPAs tax expert to discuss how to comply with the “nanny tax” employment tax requirements.