What is a Nanny Tax and Do You Really Have To Pay It?
Here's the scoop on the Employment Tax (aka the Nanny Tax)
The short answer is, yes, you must pay your nanny taxes to comply with federal law. According to the IRS, your nanny is a household employee because you control what they work on (your children) and how they should take care of them (your daily instructions). Also, you pay the nanny, or an adult babysitter, more than a set amount (which the IRS usually changes) every year,
The IRS website states if you pay cash wages of $2,100 or more, you will have to pay an employment tax (or Nanny Tax). If you pay cash wages of $1,000 or more in any calendar quarter, you'll need to pay an unemployment tax on the first $7,000. The federal unemployment tax rate is 6%, and both the parents and nanny will have to pay 7.65% for Medicare and Social Security. Contact your state tax agency (listed in an appendix to Internal Revenue Service Publication 926) to learn your unemployment tax obligations.
These rules also cover a housekeeper, gardener, or other household workers who earn more than the threshold. So if you pay your child's sitter $35 every week for Saturday night babysitting, you'll owe taxes.
It's not complicated to pay Nanny taxes, but you do need to set aside some time to make sure you complete the forms correctly. I strongly advise you to pay Nanny taxes if you're over the limit. Not only does it keep you right with the law, but your contributions will also increase your babysitter's reported Medicare and Social Security pay. That ultimately should boost any Social Security payments they receive in retirement.
Situations When You Don't Have to Pay
- If your nanny is employed by an agency or third-party who controls what work is done and how it is performed.
- If your child's sitter provides care in their own home.
- If your child is cared for by your spouse.
- If your babysitter is a student under the age of 18 (If they're not a student and babysitting is her principal occupation, you owe Nanny taxes).
- If your parent cares for your child (if you're a single parent or your spouse is physically unable to care for your child, you likely owe taxes).
The Bottom Line
If you're still confused, please consult your accountant, tax preparer, read IRS Publication 926, or call the IRS helpline for household employers at 800-829-4933. In the IRS paperwork, there is a checklist of paperwork and organizational tips you can follow to be sure that you and your Nanny are covered. Here are step-by-step instructions on how to paying the nanny tax.