These taxes can cost you about 10% over and above what you’ve agreed to pay for services. A different arrangement for childcare or for keeping a clean house might spare you this extra expense.
What Makes a Nanny a Household Employee?
The Internal Revenue Servicee (IRS) guidelines for what makes your nanny a household employee are pretty simple. Your nanny is your employee if you control what work your nanny does and how they do it. It doesn’t matter where you hired them or how you pay them—if you dictate their work and how they do it, they’re an employee, according to the IRS. An individual isn’t your employee if you hire them through an agency if the agency controls what work is done and how it’s done, or if the worker dictates what they do and how they do it. For example, your lawn servicer would not be your employee if they show up with their own lawnmower and tools at a time that works best for them, particularly if yours isn’t the only lawn they take care of. The landscaper is an independent contractor in this scenario. A babysitter generally isn’t considered your employee, either, if you drop your child off and they care for the child in their own home instead of yours.
Nanny Tax Exceptions
Assuming your nanny is indeed an employee and not an independent contractor, you don’t have to pay a nanny tax if they’re:
Your spouseYour child who’s under age 21A minor under the age of 18, unless the minor’s principal occupation is the service they’re providing for you and they’re not a student
You don’t have to pay a nanny tax for your parent, either. There’s one big, two-condition exception to this, though:
Your parent is providing childcare services for your child who is younger than 18, or an older child who suffers from a mental or physical disability that prevents self-care for at least four consecutive weeks in the calendar quarter they provided care, and You’re divorced and not remarried, your spouse has died, or you live with a disabled spouse who can’t care for your child personally for at least four consecutive weeks in the calendar quarter.
Both these circumstances must be met. You don’t have to pay the nanny tax if just one applies.
Nanny Taxes You’re Responsible for Paying
The nanny tax isn’t just Social Security and Medicare taxes—referred to as “FICA taxes”—that are normally split evenly between an employer and their employee. It also includes federal income tax withholding, although you don’t have to contribute to this. It takes into account the federal unemployment tax as well.
Social Security and Medicare (FICA) Taxes
You’re legally obligated to withhold FICA taxes from your employee’s earnings if you pay them $2,400 or more in cash wages in 2022, or $2,600 or more in 2023. These taxes are a flat percentage, so you won’t have to do a lot of complicated calculations to figure out how much to withhold. You’re responsible for paying half of them: You and your employee must each pay 6.2% for Social Security and 1.45% for Medicare, for a combined total of 7.65% each—or 15.3% including both your contributions. The IRS will expect you to pay the entire 15.3% if you neglect to withhold FICA taxes from your employee’s wages. You only have to pay into Social Security on up to $147,000 in your employee’s wages for 2022 and up to $160,200 for 2023. Earnings over these amounts are exempt from Social Security, although there’s no similar rule or limit for Medicare. Only cash wages are subject to FICA taxes, not the value of food, clothing, or other items you might provide.
Income Tax Withholding
Nanny taxes don’t include making contributions to your employee’s income taxes, nor do you have to withhold income tax from their pay unless they ask you to do so. Even then, it’s up to you to agree. You’ll have to make the correct calculations for withholding if you do agree, and you’ll have to send that money to the IRS on your employee’s behalf.
Federal Unemployment Tax
Household employers are also responsible for the federal unemployment tax (FUTA) if they pay all of their employees a combined total of $1,000 or more in any calendar quarter, up to $7,000 a year per employee. This tax works out to an additional 6% over your FICA contributions. But, again, your child under the age of 21, your parent, and your spouse are generally exempt from this tax. And you don’t have to worry about it for the rest of the year after you pay your employee more than $7,000 in any calendar year. Payment of the federal unemployment tax is solely on you. Your employee doesn’t have to contribute, and you won’t withhold anything toward it from their pay. But the IRS isn’t completely heartless. The FUTA tax rate can drop to just 0.6% because you can claim a 5.4% credit if you must also pay state unemployment taxes. To claim the credit, you must have paid all the required contributions to your state unemployment fund by April 18, 2023, for the 2022 tax year (or April 15, 2024, for the 2023 tax year). You can still claim the credit if you pay after those dates, but it’s more limited.
Tax Forms Your Nanny Must Fill Out
It’s your responsibility to make sure that the individual you’re hiring can legally work in the U.S. This means having them complete a U.S. Citizenship and Immigration Services Form I-9. You must have the completed form in hand by the first day your employee reports for work. Form I-9 includes a section that you must personally complete as well, certifying that you’ve reviewed the documents your employee gave you for verification of identity and employment eligibility. The form comes with a list of acceptable documents your nanny can use to establish their identity and work authorization. You don’t actually have to submit this form to either USCIS or the IRS, but you are required to keep the completed form for:
Three years after their first day of work if the employee works for you for less than two yearsOne year from the day they stopped working if they worked for you for more than two years.
Additionally, if your nanny is an employee, you’ll need to provide them with a W-4 form they fill out and return, along with any state tax forms required.
How To File and Pay Nanny Taxes
You’ll need an employer identification number (EIN) if you’re responsible for paying a nanny tax, but this doesn’t have to be a challenge. It’s a simple matter of going online and applying for one. You can also mail or fax Form SS-4 to the IRS to apply. Your EIN must appear on all tax forms you complete and submit, and it’s different from your Social Security number. You must file and provide a variety of documents as tax time approaches:
Prepare a Form W-2 for your employee for the previous year’s wages and give them Copies B, C, and 2 by Jan. 31 of the following tax year. FICA wages go in Boxes 4 and 6. Overall wages go in Box 1, and they include FICA wages. You must prepare a separate Form W-2 for each household employee if you have more than one. Send Copy A of the W-2 to the Social Security Administration, along with Form W-3, which acts as something of a transmittal letter. This deadline is also Jan. 31, and you can take care of this online. The Social Security website provides instructions. File Schedule H (Household Employment Taxes) with your Form 1040 by April 18, 2023, for tax year 2022 (or April 15, 2024, for the 2023 tax year). You can file the schedule by itself if you don’t have to file a federal tax return. If you file for a 1040 extension, the extension applies to Schedule H as well.
Your portion of FICA taxes, along with the amounts you withheld from your employee’s earnings, should be paid along with any other tax you might personally owe when you file your own Form 1040. They add to your tax liability. Don’t pay the Social Security Administration directly.
Don’t Overlook Your State Obligations
Reach out to your state at some point while you’re seeing to all these tasks and details. Not all states require that you pay the unemployment tax for a household employee, so contact your state’s unemployment tax agency to be sure. As for income tax withholding, this can vary from state to state as well. Some states, such as Pennsylvania, exempt household employees from withholding because the federal government does, but you won’t know until you ask.
