The Nanny Tax Law Origins
Until 1994, if you paid a nanny, babysitter, gardener, or any other household employee more than $50 in any calendar quarter, you were obligated to withhold FICA contributions from that person’s wages and to remit those taxes, together with your share of FICA tax, to the IRS. You were required to do this every three months on a quarterly basis using IRS Form 942, the Household Employer’s equivalent of the business employer’s Form 941.
At the end of the year, you were required to file a final Form 942 as well as a separate FUTA return if applicable. Because of this low wage threshold, many families, including those that only hired an occasional babysitter on Saturday nights, were covered by (and unknowingly violated) this law.
Nanny Tax Updates
In 1994, following national publicity surrounding former President Clinton’s nomination of Zoe Baird for Attorney General, who purportedly had not paid FICA taxes for her nanny, Congress simplified the Nanny Tax Laws by raising the threshold limit from $50.00 a calendar quarter to $1,000 annually ( $2,600 for 2023).
Congress has since implemented other changes, such as the “babysitter” exception. In addition, withheld taxes are now remitted to the government by Household Employers annually instead of quarterly, by attaching IRS Schedule H [Household Employment Taxes] to your individual federal income tax return.
The more complicated Form 942 is no longer used. In addition, Schedule H also is used to calculate and pay your FUTA tax liability, eliminating the need to file a separate, annual FUTA tax return.