Anyone who hires a nanny, a housekeeper, or a landscaper and who pays them more than $2,200 a year must pay household employee taxes on behalf of the worker. Commonly known as the "nanny tax," this is the employer’s share of the worker's Social Security and Medicare taxes, as well as federal unemployment tax.
The IRS raises the annual total payments threshold each tax year to keep pace with inflation.
The Definition of an Employee
According to the IRS, a household employee is someone you hire to do household work at your private home if you control what work is done and how it's accomplished. It doesn't matter if the work is full-time or part-time, or if you hired the worker through an agency or privately.
For example, a babysitter is an employee and is subject to the $2,200 threshold if you pay them and provide instructions as to how they should care for your children and if your home is the workplace—they care for your children under your roof, not at a separate childcare facility.
Common examples of household workers include:
- House cleaners
- Domestic workers
- Health aides
- Private nurses
- Yard workers
Services that aren't of a household nature, such as a tutor or secretary, aren't subject to the nanny tax, and minors under the age of 18 typically aren't considered to be employees if they're still in school. Their "profession" is that of student.
When an Employee Isn't an Employee
The amount of control you have over the work that your household professional performs also determines whether the IRS considers that person to be an employee or an independent contractor. The IRS indicates that a worker is self-employed if they control how the work is done. This relieves you of the obligation to pay employment taxes.
Self-employed workers typically use their own tools and equipment, and they offer services to the general public. They typically have more than one customer or client. For example, you might hire a lawn care business to mow your grass. The business owner uses their own equipment and probably hires and pays their own helpers, so the business owner would be considered self-employed.
You can fill out and submit Form SS-8 to the IRS if you have any questions about whether your household worker is an employee or an independent contractor. The form asks about 20 questions regarding the nature of the work being performed, and the IRS will get back to you with a formal ruling.
Process for Handling Household Employment Taxes
You have the same tax withholding obligations as any business when you pay a household employee $2,200 or more. You'll probably have a little more wiggle room in 2021 because the IRS tends to increase this income threshold annually to accommodate inflation.
Ask your employee to fill out a Form W-4. You'll withhold taxes, provide pay stubs, and file Schedule H with your federal income tax return. You'll have a few additional tasks as well to facilitate all this.
Make Sure Your Employee Can Legally Work in the U.S.
Both you and your employee must complete the U.S. Citizenship and Immigration Services (USCOS) Form I-9, "Employment Eligibility Verification," no later than the first day of work.
You don't have to submit the form to the IRS or any other government agency, but you should keep a copy for your records.
Register With the IRS and the State
You'll need an employer identification number (EIN) in order to set up payroll and employment tax accounts so your taxes can be processed correctly. Fortunately, the IRS makes this part easy.
You can register for an EIN online at the IRS website from 7 a.m. to 10 p.m. Eastern Standard Time, Monday through Friday. You'll need a valid Social Security or Individual Tax ID Number.
Set Up Payroll and Taxes
Decide how frequently you're going to pay your employee, such as weekly, biweekly, or semimonthly. Select payroll accounting software—it's not required, but it can be a big help. Set up direct deposit and processes for issuing pay stubs. Again, direct deposit isn't required, but it's easier and your employee will thank you for it.
You must withhold and remit Social Security and Medicare taxes from your employee's pay. These taxes are 15.3% of wages paid combined, but only wages paid up to $137,700 are subject to the Social Security tax as of 2020. In 2021, the threshold is $142,800. Typically, the employer and the employee each pay 7.65%.
Some employers elect to pay the entire 15.3% themselves and not withhold taxes from the employee.
You'll also pay a 6% federal unemployment tax (FUTA) on the first $7,000 a year paid to your employee, but you might be eligible for a credit of up to 5.4% if you also pay a state unemployment tax. Visit the U.S. Department of Labor website for a list of state unemployment tax agencies.
Give your employee a Form W-2 at the end of the year that reports their annual wages and tax withholdings. File Schedule H with your own Form 1040 to summarize the annual payroll taxes. You can also choose to pay quarterly estimated household employment taxes using Form 1040-ES.
The legal process of hiring a nanny can sometimes be complex. You might want to hire an accountant through a nanny payroll service to help you set up processes and prepare your tax filings.
Benefits for the Employee
Household employment taxes establish a work history for your employee so they can collect benefits such as Social Security and Medicare and unemployment compensation if they're laid off. Domestic workers are also eligible for disability insurance in a few states if they're unable to work due to injury or illness.