The Nanny Tax: Who Owes It and How to Pay It
Is your nanny a household employee under IRS rules?
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?
An individual isn’t your employee if you hire them through an agency, and if you pay the agency and the agency pays them. Your babysitter generally isn’t considered your employee, either, if you drop your child off and they care for the child in their own home.
An individual isn’t your employee if they dictate when they work for you and what they do while they’re working, even if you bypass the agency and hire them directly. 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.
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.
Some More Exceptions
Assuming your worker 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, but there’s an exception to this exception. You must pay the nanny tax in this case if:
- 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 three months, and
- You’re divorced and not remarried, your spouse has died, or your spouse is disabled and can’t care for your child personally for at least four consecutive weeks in three months.
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 paid them $2,300 or more as of 2021. 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 2021, 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 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 don’t have to continue paying into Social Security after you’ve paid your employee the wage base limit, which is $137,700 in 2020, increasing to $142,800 in 2021. 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, although if you give cash for these items, that is taxable.
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.
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 employees $1,000 or more in any calendar quarter, up to $7,000 a year. 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 all 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 and if you do so by April 15, 2021, for the 2020 tax year. You can still claim a credit if you pay after that date, 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 Form I-9, the Employee Eligibility Verification. It’s technically a U.S. Citizenship and Immigration Services (USCIS) form, not an IRS form, and 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, one of which is a Social Security card bearing the employee’s Social Security number. You don’t actually have to submit this form to either USCIS or the IRS, but they strongly advise that you keep it on hand in case you’re ever asked for it.
It’s OK 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 should visit the nearest Social Security office as soon as possible to get one.
You’ll also need a completed Form W-4 from your employee if you’ll be withholding federal income tax. The information contained in this form is pertinent to calculating how much to withhold.
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. 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 January 31st 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 January 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. You can file the schedule by itself if you don’t have to file a federal tax return, and if you file for an extension to file your 1040, the extension applies to Schedule H as well. This form covers FUTA taxes and any income taxes you might have withheld, along with FICA taxes.
The IRS announced on March 17, 2021 that the filing deadline for 2020 individual tax returns is extended to May 17, 2021 due to the ongoing national effects of the coronavirus pandemic. This change does not apply to businesses, but the nanny tax schedule accompanies the individual Form 1040.
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.
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 (or May 2021) 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.