What is the “Nanny Tax”?
Hiring the “right” nanny or other household employee can be a difficult task. Although finding a trustworthy, competent employee will be your top priority, families who choose to hire their own household help will also need to understand the “nanny tax”. The nanny tax is a federal tax paid by people who employ household workers and pay wages over a certain amount. The 2023 nanny tax threshold is $2,600, which means if a household employee earns $2,600 or more in cash wages this year, Social Security and Medicare taxes must be paid by the employee (and employer).
How to Pay Your Nanny Taxes
Now let’s get into the process of actually paying nanny taxes. Below are the six steps to ensure you are “paying by the rules.”
Step 1: Determining Employment Eligibility
When you hire a household employee to work for you, you are responsible for verifying that this person is legally eligible to work in the United States.
Step 2: Registering with the IRS and State Revenue Departments
Your next step is to register with the Internal Revenue Service (IRS) as a Household Employer. Start by either completing Form SS-4 to obtain an Employer Identification Number, or EIN. You can also apply online at the IRS website.
Step 3: Determining Compensation
The next step is to decide how much you will pay your nanny (keep in mind that the government sets certain minimum standards). You need to know how much you’re paying your nanny to figure out the appropriate amount of tax to pay and to withhold.
Step 4: Determining What Taxes You Must Withhold
If you will pay your household employee $2,600 or more this year in gross wages, you are required by federal law to withhold and pay Social Security and Medicare taxes, which are sometimes collectively referred to as FICA taxes. You are not obligated to withhold federal income tax from your household employee’s wages unless you and your household employee both agree to do so. To avoid your nanny having a large tax bill at year end, it’s a good idea to withhold income taxes.
Step 5: Mandatory Tax Forms
- Form W-2 – You must provide your household employee with this form by the end of January each year so they can use it to file their tax return.
- Form W-3 and Form W-2 Copy A – The Social Security Administration requires you to file these forms to let them know that you’ve properly withheld FICA taxes from your caregiver and remitted FICA taxes of your own throughout the year.
- Schedule H – Complete this form and file it with your federal income tax return.
- Your state may also require an Annual Reconciliation form, which summarizes the state income taxes you withheld from your nanny.
Step 6: Know Your Other Obligations
You will be required to file your state tax returns usually on a quarterly basis (in some states, the filing requirement may be annual or monthly). You may also need to send to the IRS estimated payments (Form 1040ES) four times a year. Increasing your own federal withholding with your own employer can avoid having to make quarterly estimated payments.
Why You Shouldn’t Pay Your Nanny “Under the Table”?
Although household employment tax laws certainly add an additional expense to your childcare budget, you really can’t afford not to comply with the law. Although some nannies may even ask to be paid “under the table”, a family that agrees to such an arrangement is taking significant legal and financial risks. Paying your household employee legally will ensure the following:
- You won’t need to worry about putting your family in jeopardy in the case of an audit or exposure.
- Your nanny will be treated like the professional she is, and fosters her future financial security.
- You provide your nanny with a verifiable wage history which helps her apply for loans and build a solid credit history.
- Your nanny will be eligible to apply for state unemployment benefits, as well as workers’ compensation and disability protection in many states.
So, I’m a New Employer – Where Do I Start?
For over twenty years, NannyPay DIY household payroll software has been helping new employers, just like you, understand and comply with the law. NannyPay, now available as Desktop or Cloud Software, is a secure and cost-effective nanny tax payroll management software for calculating taxes for your household employee. More than just a tax calculator, NannyPay will maintain all your nanny tax payroll records. THE BEST NEWS – at less than $200/per year, we save you thousands of dollars over our competitors!