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The “nanny tax” may sound like the title of a mediocre sitcom, but the household employer’s tax is no laughing matter.
If you employ someone to regularly care for your children in your home you should familiarize yourself with the household employer’s tax. It’s a federal tax that’s often referred to as the “nanny tax” since nannies are among the types of workers the IRS considers household workers.
If you work as a nanny, managing the nanny tax is your employer’s responsibility — not yours. But you’re still responsible for paying any tax that may be due on income you earn, whether you’re considered an employee or not.
Let’s look at the household employer’s tax, whom it applies to, when it comes into play and who’s responsible for paying it.
- What is the nanny tax?
- Do I have to pay the nanny tax?
- When does the nanny tax kick in?
- How do I pay the nanny tax?
To understand what the nanny tax is, let’s start with this: Employers are typically required by law to pay federal employment taxes (and possibly certain state, municipal and/or county taxes) for every employee who works for them. Federal employment taxes include Social Security tax, Medicare tax, federal unemployment tax and federal income.
If you employ someone to work in your home — for example, a nanny, babysitter or housekeeper — the IRS may consider you an employer and require you to pay certain employment taxes for that employee.
So who’s your household employee? The teenager who babysits for you on the weekends? A nanny who worked for you only a few weeks of the year?
Am I a household employer?
You’re a household employer if you have a household employee, the IRS says. If you hire someone to do household work around your private home, and you control the work they do and how they do it, they’re your household employee. It doesn’t matter whether the work is full time or part time, how you pay the worker (hourly, weekly or by the job) or if you hired them yourself or through an agency or association.
The household employee designation is for more than just nannies and babysitters. The IRS says examples of workers who do household work include …
- Domestic workers
- Health aides
- House cleaning workers
- Private nurses
- Yard workers
Who’s not a household employee?
Not everyone you hire to do work for you in your home will be considered a household employee. The two key components are the control they have over the work being done and if that work is done in your private home.
For example, if you hire someone to care for your children but it’s at the caretaker’s home or a day care center, that person would not be a household employee. Likewise, if you hire a lawn care crew to tend to your yard and they bring their own tools and also service your neighbors’ yards, they likely would not be household employees.
You may have to pay nanny taxes if …
- You pay cash wages of $2,100 or more during this tax year to a household employee. In that case, you’ll need to withhold and pay Social Security and Medicare taxes, which are 15.3% of the employee’s wages. Additional requirements may apply for individual employees whom you pay more than $200,000 in wages. You’ll split the amount evenly, each paying 7.65%. However, you’re off the hook when it comes to money you pay your spouse, your child younger than 21, your parent, or anyone younger than 18 at any time in the year. In those situations, you don’t have to pay Social Security and Medicare taxes
- You pay cash wages of $1,000 or more in any calendar quarter of the current or prior tax year to all household employees (again, your spouse, parent or child younger than 21 don’t count). In that case, you’ll need to pay a 6% federal unemployment tax on a portion of the employee’s wages. To find out if you need to pay state unemployment tax, contact your state’s unemployment tax agency.
It’s important to note that nanny taxes work differently from federal income taxes. As a household employer, you’re not required to withhold federal income tax from wages you pay your household employee. You can do so if both you and your employee agree to tax withholding, in which case they’ll need to give you a completed Form W-4. If you do withhold federal income tax from the employee’s wages, then you’re responsible for paying it to the IRS.
As a household employer, it’s your responsibility to pay the nanny tax if you owe it.
Step 1: Get an EIN
If the IRS considers you an employer, you’ll need to have an Employer Identification Number, or EIN, from the IRS before you file any forms related to your nanny or other household employee. Instead of your Social Security number, you’ll use your nine-digit EIN when reporting your nanny tax obligation. You can apply for an EIN at IRS.gov/EIN by faxing or mailing Form SS-4 to the IRS.
Step 2: Verify eligibility to work in the U.S.
Once you have an EIN, you and your nanny should fill out Form I-9 to verify that they’re eligible to work in the U.S. Part of this form includes a list of documents that are acceptable as proof of employment eligibility in the U.S.
Step 3: Issue a Form W-2
If you paid your household employee Social Security and Medicare wages of $2,100 or more, or withheld federal income tax from your employee’s wages, you’ll have to file a W-2 and give it to your employee by Jan. 31 of the calendar year following the tax year. You’ll also need to send a copy of the form to the Social Security Administration by the same date.
Step 4: Pay your nanny tax
To pay your nanny tax, you’ll attach Schedule H to your Form 1040 when you file your own federal income tax return. The form can help you calculate your total household employment taxes. Pay the amount you owe — and any other tax you may owe — by the tax filing deadline (usually April 15).
If you don’t want to pay your entire nanny tax in one shot when you file your tax return, you may have other options, like making estimated tax payments to the IRS throughout the year.
Keep in mind different states have different state tax laws, so you’ll need to find out how your state requires you to handle employer taxes and state income taxes for your household employee.
You can learn more about federal household employer’s taxes in IRS Publication 926.
When you pay your nanny tax obligations, you might benefit both you and your nanny. You can avoid getting into trouble for not doing what the federal government requires you to do regarding employer taxes. And you’re helping your nanny contribute to Social Security, which may benefit your nanny in the future if they’re eligible to receive Social Security benefits when they retire.