Do I Have to Pay Nanny Tax?

Understanding taxes can be hard. And when it comes to hiring a household employee – like a nanny – navigating the system can get even tougher. 

In many cases, household workers expect to be paid in cash. But, even if you choose to pay them in dollar bills, you may still be on the hook for the nanny tax.

Unfortunately, the Internal Revenue Service (IRS) can find out if you don’t pay taxes on household employee wages. For example, your employee could get hurt on the job or file for unemployment benefits at which time it becomes obvious they aren’t covered.

Additionally, the IRS could ask about regular payments to a particular person if you’re ever audited.

At the end of the day, it’s best to understand the ins and outs of when you need to pay taxes on your household employees.

How do I know if I have to pay a nanny tax?

Not everyone has to pay nanny tax. For example, if you take your kids to a day care center or to someone’s house, you probably don’t have to worry about it.

In these cases, the child care workers may be employees of the day care center, independent contractors or part of another type of business. Someone is also likely to be an independent contractor if he or she has several different clients.

If your child is cared for by your spouse, your child under age 21, your parent, or any child under 18, and you pay that person, you generally don’t have to pay Social Security and Medicare taxes.

You also won’t get stuck paying nanny tax on every high school student who watches your kids on Saturday night, either.

You must pay employment taxes if you pay your nanny – or any household employee:

• $2,000 or more during a calendar year or
• a total of $1,000 to your employees during any quarter

If you regularly pay someone to care for your child at your home, you probably need to pay nanny tax. Here’s how to go about it.

How to handle the “nanny tax”

Step 1: Ask your household employee for a Social Security number or an Individual Taxpayer Identification Number, a completed Form I-9 and a completed federal Form W-4, as well as a state income tax withholding form (if your state has an income tax). Also, you can ask the employee if they want you to withhold income taxes from their pay (this is optional).

Step 2: When you pay your employee, deduct income tax withholding if you and the employee have agreed to it. You can use the tables in IRS Publication 15, Employer’s Tax Guide, to determine the correct amount to withhold.

In addition, for 2017, you should withhold 7.65 percent of the wages to cover the Social Security and Medicare taxes your employee has to pay.

Keep in mind, as the employer, you also have to pay 7.65 percent of each employee’s wages to Social Security and Medicare taxes.

To cover those costs, you could withhold the percent you’re liable for from the employee’s wages too. Another option is to pay both shares of these taxes yourself.

Remember not to deduct Social Security and Medicare tax from amounts you pay your spouse or your child under age 21. Generally, you also don’t have to deduct taxes from your parent or anyone under age 18.

Step 3: To avoid a big tax bill and possible penalties next year, make estimated tax payments each quarter or increase the amount of income tax your employer withholds from your pay.

Step 4: As an individual (and not a business), you can file Schedule H, Household Employment Taxes, with your individual income tax return. This is easier than filing multiple forms throughout the year as a sole proprietorship or another business would be required to do.

On Schedule H, you’ll report:

• Federal income tax you withheld from your employee’s pay.
• Federal Unemployment Tax (FUTA) if you paid cash wages to household employees totaling more than $1,000 in any calendar quarter during this year or the prior year. Generally, you pay FUTA taxes on the first $7,000 of cash wages to each household employee. Do not pay FUTA taxes on wages paid to your spouse, your child under age 21 or your parents. Any state unemployment taxes you pay generally reduce your FUTA tax.
• Social Security and Medicare tax. You pay 15.3 percent total Social Security and Medicare tax, which includes the 7.65 percent you may have withheld from your employee’s pay.

Step 5: Check your state laws to learn about any additional household taxes you may need to pay and report.

Step 6: After the end of the year, you must complete Form W-2 for each employee and provide copies to them. You must also send a summary Form W-3 to the IRS.