The Ultimate Guide to Paying Nanny Tax

KEY TAKEAWAYS

• Nanny taxes are taxes that are required to be paid by people who have household employees. This can include a nanny, a personal assistant, or a senior caregiver. 
• Nanny taxes are required to be paid if you pay wages to a household employee that are over a predetermined threshold. 
• For tax purposes, the IRS recognizes ongoing help as household employees instead of an independent contractor. 

What Are Nanny Taxes? 

Nanny taxes are specifically outlined tax requirements for when you hire a household employee. This can include a nanny, a personal assistant, or a senior caregiver, for example. The IRS Publication 926 describes the household employment rules in more detail and even provides a checklist of things you need to do when hiring someone. 

For the 2022 tax year, you would have to pay nanny taxes if you have a household employee who earns $2,400 or more in the calendar year.The cash wages threshold goes up to $2,600 for tax year 2023.Federal unemployment insurance taxes (FUTA) also come into play if you pay a household employee $1,000 or more in a calendar quarter. 

It’s also worth mentioning that the specific requirements for nanny taxes can differ depending on where you live. Each state has a varying approach to taxes. For example, not every state charges an income tax and others require additional taxes to get withheld.

How to Pay Nanny Taxes 

If you’re going to pay nanny taxes, you need to have an employer identification number (EIN) from the IRS. All you have to do is go to the IRS website and apply online. Or you can fax or mail Form SS-4 directly to the IRS.

Although you must withhold and pay the social security taxes, you are not required to withhold your household employee’s federal income taxes if they don’t wish you to do so. This, however, does not mean that you and the employee won’t have to pay taxes at all. The employment taxes will be paid when filing your tax return. If your employee chooses to have their income taxes withheld, they will need to submit a W-4 form to you.

As tax time approaches, there are some important documents to put together.

This includes:

• You will need to prepare Form W-2 for your employee’s wages from the previous year. They will receive Copies B, C, and 2. Every individual employee must have Form W-2 completed and submitted.
• Next, you will need to send Copy A of Form W-2 directly to the Social Security Administration. As well, you will send Form W-3 and all of this can be done online on the Social Security website. 
• Finally, you will file Schedule H (Household Employment Taxes) with Form 1040 for the tax year. If you don’t need to file a federal tax return you can file this on its own.

What Are the Requirements for Nanny Taxes?

One of the first things you should do is confirm the nanny tax requirements for your specific location and state. If you have a household employee, you must request with the IRS to become an employer by applying for a employer identification number (EIN) 

There can be penalties imposed if you fail to pay your employment taxes. As well, if a family misclassifies a household employee they can get charged with tax evasion. 

So what are the actual nanny taxes you’re responsible for paying?

Social Security and Medicare (FICA) Taxes 

If your household employee earns $2,400 or more in 2022 ($2,600 in 2023), you’re legally obligated to pay FICA taxes. The good news is that there aren’t a lot of complicated calculations as the taxes are a flat percentage. 

In 2022 and 2023, both you and the employee would contribute 6.2% to Social Security as well as 1.45% to Medicare. This would total 15.3%, and the IRS expects that you will pay the entire amount if you withhold FICA taxes. Alternatively, the FICA tax will be due when you file your tax return. 

Withholding Income Tax

Income tax withholding is entirely up to you and your employee. You don’t have to withhold income tax from your employee unless they specifically ask you to.The employee should notify you (via W-4 form) if they want you to withhold their income taxes during the year. 

Federal Unemployment Tax

If you pay your household employees a total of $1,000 combined in any calendar quarter, you become responsible for the federal unemployment tax (FUTA). You only need to do this up to a total of $7,000 a year per employee. 

It’s worth noting that the federal unemployment tax requirements are your responsibility. You don’t withhold any amount from employee pay, meaning they don’t contribute. You can even reduce the FUTA tax rate by claiming a 5.4% credit for state unemployment taxes.

What Are the Advantages of Paying Nanny Taxes? 

Similar to paying other types of taxes, paying nanny taxes is a legal requirement. That said, there are some advantages that you can receive in return for making your nanny feel like the professional they are.

Here are some of the biggest advantages of paying nanny taxes: 

• Tax Breaks — These can include the child care tax credit and Dependent Care Accounts.
• Protection and Benefits — Paying your nanny properly allows them to receive certain benefits and protections in return. For example, Medicare, Social Security Income, and unemployment benefits. 

Financial Protection — Paying employees legally avoids unnecessary headaches such as labor law violations, IRS audits, or overtime disputes.

What Happens If You Skip Nanny Taxes?

While household employment taxes can sometimes be complicated, it’s critical to ensure you pay them correctly. It might not seem like a big deal, but there can be negative consequences. 

Below are the risks you face if you choose to skip paying nanny taxes.

• You could be charged with tax fraud, which is a felony offense.
• The employment could lead to workplace injury, leading to you having to pay hefty medical expenses. This would usually be covered under Workers’ Compensation Insurance.
• If your employee files an unemployment benefits claim, it can lead to an audit by the IRS which can result in financial penalties. 

What Are the Exceptions to Nanny Taxes? 

There are a few different exemptions that are allowed by the IRS when it comes to nanny taxes. Some of the main tax exemptions to nanny taxes include paying the following people: 

• Spouses
• An additional child of the actual employer who is not over the age of 21
• If the employee or nanny is under the age of 18
• Parents of the employer 

However, there are a few additional criteria for parents of the employer. Parents are tax exempt unless the parent has to care for the child or the employer in question is divorced and hasn’t remarried or as been widowed. The exemption also doesn’t apply if your spouse has a type of mental condition that requires care for more than four continuous weeks during a quarter.. 

FUTA is not required to be paid on wages paid to your spouse, your child who is under the age of 21, or your parent.

Summary

If you hire a household employee, you’re required to pay nanny taxes. The taxes are a combination of both state and federal tax requirements. These details are outlined in IRS Publication 926. A household employee could include a nanny, a senior caregiver, or a personal assistant. 

Nanny taxes come into play if you have a household employee who earns $2,400 or more in a calendar year. If you’re paying nanny taxes, you will withhold FICA taxes from the employee’s paycheck. These are the Social Security and Medicare taxes. Plus, you may need to withhold federal and state income taxes.