The Nanny Tax: Who Owes It and How to Pay It

Is your nanny a household employee under IRS rules?

How to stop the awful feeling that your child loves the babysitter more than you!
••• Getty Images/ONOKY - Eric Audras

It might come as a surprise to learn that you’re technically an employer if you pay someone to watch your kids or to clean your home. Household workers can be your employees, although there are some exceptions. They—and you—will owe the government employment taxes, often referred to as “nanny” taxes, when the individual is classified as an employee according to tax rules.

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 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 from where you hired them or how you pay them—if you dictate what their work is and how they do that work, 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 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.

Note

Independent contractors are responsible for paying their own Medicare and Social Security taxes—the components of employment taxes—in the form of the self-employment tax.

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 spouse
  • Your child who’s under age 21
  • A 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. 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: As of 2022, 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.

Note

You don’t have to remit the money to the IRS every pay period, but you’ll probably want to put it in a separate, dedicated bank account so it’s available when it comes time to pay. 

You only have to pay into Social Security on up to $142,800 in your employee's wages in 2021 and up to $147,000 in 2022. 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. 

Tip

Consider enlisting the help of a tax professional for income tax withholding, because these calculations can be somewhat complicated.

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. 

This $1,000 earnings threshold is per quarter (every three months), not per year. "Quarterly" works out to January through March, April through June, July through September, and October through December. 

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 15, 2022, for the 2021 tax year and by April 18, 2023, for the 2022 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 years
  • One 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.

Note

It’s okay if your employee doesn’t have a Social Security card if they have sufficient other documentation to prove their identity and legal work status, but they must apply for a Social Security card on Form SS-5. 

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 15, 2022, for tax year 2021, and by April 18, 2023, for tax year 2022. 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.

Tip

If you're a nanny, you might want to pay your nanny tax in quarterly estimated payments as the year progresses, or ask your own employer to increase your withholding to cover these additional taxes. You could be subject to an underpayment penalty if you wait until you file your tax return in April and it turns out that you owe a nanny tax balance because you didn’t pay in enough.

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.

Frequently Asked Questions

How do you file taxes if you're a nanny?

If you're a nanny who cares for children in your employer's home, you're likely an employee. That means you file taxes the same way as any other employed person. You would file Form 1040 using the W-2 provided by your employer. You'll likely need to pay state taxes as well.

Can you claim a nanny on your taxes?

You can't claim a nanny on your taxes, but you may be eligible for the child and dependent care tax credit. To claim the credit, the qualifying child must be under age 13, and the nanny must be looking after them because you're working or looking for work. You must have an adjusted gross income of $438,000 or less to be eligible for the credit.

Article Sources

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