The Nanny Tax and What You Should Know
If you employ a nanny, eldercare giver, private nurse, or other household employees, you likely are required to pay the so-called “Nanny Tax”. According to the IRS, if you employ someone to do work in or around your home, he or she will be regarded as your household employee if you (the employer) control:
- The type of work the person performs, and
- How that person performs his job (the daily instructions you give)
If the worker is your employee, and you pay them over a specific wage amount, you are required by federal law to withhold and pay Medicare and Social Security taxes on those wages (commonly called FICA taxes), as well as federal unemployment taxes (FUTA). You may also have state unemployment, disability, or other employment tax obligations as well.
Key Things to Know about the Nanny Tax in 2023
If you pay $2,600* or more to your household employee this year, you must withhold and pay Social Security and Medicare taxes, commonly known as the “Nanny Tax”. If you paid $1,000 or more to any household employee in any calendar quarter of this year or last year, you are required to pay the federal unemployment tax as well.
Typically, if you employ household staff and pay them above these wage thresholds, you are also required to register with the IRS as an employer and receive an Employer Identification Number, or EIN. This EIN is used whenever you deal with the IRS or other relevant agencies with respect to your household employment taxes.
You can apply online and get your federal EIN within minutes. Here is the official IRS link: EIN Online. When you apply for an EIN, be sure you indicate that you are a “household employer”. It is important to be sure the IRS knows you are registering as a household employer because you are not required to file certain quarterly returns that business employers are required to file (e.g., Forms 941 and 940).
Social Security and Medicare taxes are paid by both the employee and the employer at the current total rate of 12.4% and 2.9 % of gross wages, respectively. One-half of the Social Security (6.2%) and Medicare tax (1.45%) is withheld from your employee’s wages. You as the employer must pay the other half of those taxes. Household employers have the option to not withhold the employee’s share but pay the total tax themselves (i.e. 15.2%).
Families that fail to comply, or who misclassify a nanny or other household employee as a freelancer or an independent contractor, face not only legal consequences for non-compliance but will be required to pay not only their own share of the Social Security and Medicare tax but also the employee’s share that they failed to withhold.
Benefits of Paying Your Nanny “Above the Table”
Paying the “Nanny Tax” is not only the law and right thing to do but paying your nanny “above the table” is beneficial to both the family (employer) and the nanny in several ways. Here are just some of the benefits of paying by the rules:
For the Employer:
- By paying your nanny and domestic employees legally, you reinforce to them the importance of the work they will be doing for your family. In treating your household staff as the professionals they are, you will attract higher quality applicants, and foster a stronger work relationship with your nanny or other household staff, which in turn should result in a higher level of service provided to your family;
- By paying your nanny by the rules, your family can take advantage of special tax savings, such as the Child and Dependent Care Tax Credit and/or your own employer’s Dependent Care Flexible Spending Account. These tax savings can amount to thousands of dollars each tax year, and may offset or at least minimize the added cost of paying your nanny legally;
- If you do not pay your employee legally and do not carry workers’ compensation insurance, you may be liable for medical expenses and lost wages if your nanny gets hurt in your home while she is on the job;
- Although both you and your nanny will surely expect to enjoy a mutually beneficial working relationship when she is first hired, difficulties may arise which require you to fire or lay off this household employee at some point. If you do not pay your nanny legally and did not contribute to your state’s unemployment insurance fund, you and your family may be liable for significant taxes and penalties if and when your nanny applies for unemployment benefits after her employment is terminated, and the fact that you have been paying her “under the table” becomes known to the government; and
- Last, but certainly not least, you will have peace of mind since you won’t have to worry about government penalties, fines, audits, or even lawsuits.
For the Nanny:
- Being paid legally and “above the table” provides your nanny with a work and wage history toward Social Security and Medicare eligibility, and enables her to collect unemployment benefits in the event of unexpected job loss;
- Being paid legally gives your nanny, elder caregiver, or other household employees a verifiable employment history that can assist them in finding other employment when your family no longer needs in-home childcare or elder care;
- By being paid legally, the nanny gains a verifiable income source and wage history, which will be necessary for him or her to apply for a mortgage, car loan, or credit card, and helps them build a valuable credit history; and
- By paying your nanny and other household employees legally, it treats them as the professionals they are and demonstrates how much you value their work, thereby leading to higher job satisfaction.
Where Can I Learn More About Being a Household Employer?
The following are the publications and forms you should look at first to learn more about the rules and your obligations as a new household employer:
IRS Publication 926 [Household Employer’s Tax Guide]
Forms (and Instructions)
• Form W-4, Employee’s Withholding Allowance Certificate
• Form I-9, USCIS Employment Eligibility Verification
• Form W-2, Wage and Tax Statement
• Form W-3, Transmittal of Income and Tax Statements
• Schedule H, Household Employment Taxes
Why You Should Choose NannyPay DIY Payroll Software
For more than two decades, NannyPay DIY payroll software has been helping families understand and comply with the Nanny Tax laws. NannyPay calculates the appropriate withholding taxes for you, and will even generate at year-end IRS Forms W2/W3 and a Schedule H, which is the form most household employees must file to report and pay their federal employment taxes each year. DIY software like NannyPay helps keep you legal and can save you time and frustration, as well as thousands of dollars in the long term compared to hiring expensive nanny payroll services to do it for you.
*Updated April, 2023
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