Many families hire household workers to care for their children, their home or their outdoor spaces. If you’re among them, be sure you know the nuances of the “nanny tax.”
Withholding taxes
For federal tax purposes, a household worker is anyone who does household work for you and isn’t an independent contractor. Common examples include child care providers, housekeepers and gardeners.
If you employ such a person, you aren’t required to withhold federal income taxes from the individual’s pay unless the worker asks you to and you agree. In that case, the worker would need to complete a Form W-4. However, you may have other withholding and payment obligations.
You must withhold and pay Social Security and Medicare taxes, otherwise known as “FICA” taxes, if your worker earns cash wages of $2,300 or more (excluding food and lodging) during 2021. If you reach the threshold, all wages (not just the excess) are subject to FICA taxes.
Employers are responsible for withholding the worker’s share and must pay a matching employer amount. The Social Security tax portion of FICA taxes is 6.2% for both the employer and the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total). If you prefer, you can pay your worker’s share of Social Security and Medicare taxes, instead of withholding it from pay.
However, if your worker is under 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. Therefore, if your worker is really a student/part-time babysitter, there’s no FICA tax liability.
Reporting and paying
You pay nanny tax by increasing your quarterly estimated tax payments or increasing withholding from your wages rather than by making an annual lump-sum payment. You don’t have to file any employment tax returns — even if you’re required to withhold or pay tax — unless you own a business. Instead, your tax professional will report employment taxes on Schedule H of your individual Form 1040 tax return.
On your return, your employer identification number (EIN) will be included when reporting employment taxes. The EIN isn’t the same as your Social Security number. If you need an EIN, you must file Form SS-4.
A keen awareness
Retaining a household worker calls for careful recordkeeping and a keen awareness of the applicable rules. Keep in mind that you may also have federal unemployment tax (FUTA) liability, as well as state and local tax obligations. Contact us for assistance complying.