Is your nanny a household employee under IRS rules?
It may surprise you to hear that if you hire someone to watch your children or clean your house, you are technically an employer. Although there are several caveats, household staff might be your employees. When an individual is designated as an employee under tax regulations, they - and you - will owe the employment taxes to the government, also known as "nanny" taxes.
Over and above what you've agreed to pay for services, these taxes can cost you around 10%. You might be able to avoid this extra cost by making a different arrangement for daycare or housekeeping.
What makes a nanny a household employee?
The IRS criteria for determining whether or not your nanny is a household employee are straightforward. If you have control over what work your nanny does and how they do it, your nanny is your employee. According to the IRS, it doesn't matter where you hired them or how much you paid them. If you tell them what to do and how to do it, they're an employee.
If you hire someone through an agency, the agency controls what work is done and how it is done, or the worker defines what they do and how they do it, then that person is not your employee.
Your lawn servicer, for example, is not your employee if they arrive with their own lawnmower and tools at a time that is convenient for them, especially if yours isn't the only lawn they maintain. In this case, the landscaper is an independent contractor.
If you leave your child with a babysitter and they care for the child in their own home instead of yours, they aren't regarded as your employee.
In the form of the self-employment tax, independent contractors are responsible for paying their own Medicare and Social Security taxes, which are components of employment taxes.
Nanny tax exceptions
If your nanny is an employee and not an independent contractor, you are not required to pay a nanny tax if they are:
- Your spouse.
- Your child who’s under age 21.
- Unless the kid's primary occupation is the service they're giving for you and they're not a student, and/or a minor under the age of 18.
You are not required to pay a nanny tax for your parent. However, there is one major two-condition exception to this rule:
- For at least four weeks in the calendar quarter in which they provided care, your parent offered childcare services for your child who is younger than 18, or an older child who has a mental or physical handicap that precludes self-care.
- You're divorced and haven't remarried, your spouse has passed away, or you live with a disabled spouse who can't physically care for your child for at least four weeks in a 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, often known as "FICA taxes," which are generally paid evenly between the employer and the employee. It also includes withholding for federal income taxes; however, you are not required to contribute. It also takes the federal unemployment tax into account.
Social Security and Medicare (FICA) Taxes
If you pay your employee $2,400 or more in cash compensation in 2022, you must lawfully withhold FICA taxes from their profits. You won't have to make any hard calculations to figure out how much to withhold because these taxes are a flat percentage.
You're accountable for half of the costs: You and your employee will each have to pay 6.2 percent for Social Security and 1.45 percent for Medicare starting in 2022, for a total of 7.65 percent — or 15.3 percent if both of your contributions are combined. If you fail to withhold FICA taxes from your employee's earnings, the IRS will require you to pay the full 15.3 percent.
You don't have to send the money to the IRS every pay month, but it's a good idea to keep it in a separate, dedicated bank account so it's ready to pay when the time comes.
In 2021, you only have to pay into Social Security on wages up to $142,800, and in 2022, you only have to pay into Social Security on wages up to $147,000. Earnings in excess of these levels are not subject to Social Security, but there is no such restriction or cap for Medicare.
FICA taxes apply only to cash compensation, not the value of any food, clothing, or other commodities you may supply.
Income tax withholding
Making payments to your employee's income taxes is not included in nanny taxes, and you are not required to withhold income tax from their salary unless they request it. Even then, the decision is yours to make. If you agree, you'll have to make the proper computations for withholding and submit the money to the IRS on your employee's behalf.
Because income tax withholding computations can be tricky, consider seeking the expertise of a tax specialist.
Federal unemployment tax
Household employers are additionally liable for the federal unemployment tax (FUTA) if they pay a total of $1,000 or more to all of their employees in any calendar quarter, up to a maximum of $7,000 per employee per year. This tax amounts to an extra 6% on top of your FICA contributions. However, this tax is normally exempt from your child under the age of 21, your parent, and your spouse. After you pay your employee more than $7,000 in any calendar year, you don't have to worry about it for the rest of the year.
This $1,000 earnings cap applies every three months, not every year. The months of January to March, April to June, July to September, and October to December are referred to as "quarterly."
You are exclusively responsible for paying the federal unemployment tax. Your employee is not required to contribute, and you will not deduct anything from their wages to cover it. The IRS, on the other hand, isn't wholly callous. Because you can claim a 5.4 percent credit if you must also pay state unemployment taxes, the FUTA tax rate can be as low as 0.6 percent. You must have paid all required contributions to your state unemployment fund by April 15, 2022, for the 2021 tax year and April 18, 2023, for the 2022 tax year to be eligible for the credit. If you pay beyond specified dates, you can still get credit, but it will be limited.
Tax forms that your nanny must fill out
It is your obligation to ensure that the person you are hiring is legally permitted to work in the United States. This entails having them fill out a Form I-9 from the US Citizenship and Immigration Services. By the first day your employee reports for work, you must have the completed form in hand.
You must also personally complete a portion on Form I-9, verifying that you have studied the documentation your employee provided for verification of identification and job eligibility. A list of approved documents your nanny can use to establish their identity and work authorization is included with the form.
You are not needed to submit this form to USCIS or the IRS, but you must maintain it for the following reasons:
- If the employee has been with you for less than two years, three years after their first day of employment.
- If they worked for you for more than two years, you have one year from the date they quit working.
- If your nanny is an employee, you'll need to provide her with a W-4 form to fill out and return, as well as any state tax papers she might need.
It's fine if your employee doesn't have a Social Security card as long as they have enough additional evidence to confirm their identity and lawful employment status; nonetheless, they must apply for one on Form SS-5.
How to file and pay nanny taxes
If you're responsible for paying a nanny tax, you'll need an employer identification number (EIN), but it doesn't have to be difficult. It's as simple as going online and filling out an application. You can also apply by mailing or faxing Form SS-4 to the IRS. Your EIN is separate from your Social Security number and must appear on any tax documents you complete and submit.
As tax season approaches, you'll need to submit and provide a variety of documents:
- Prepare a Form W-2 for your employee's salary from the previous year and provide them Copies B, C, and 2 by January 31 of the following tax year. Boxes 4 and 6 are for FICA wages. Overall wages, including FICA wages, are reported in Box 1. If you have more than one home employee, you must prepare a separate Form W-2 for each one.
- Send Copy A of the W-2, as well as Form W-3, which serves as a transmittal letter, to the Social Security Administration. The deadline for this is likewise January 31, and you can do it online. Instructions are available on the Social Security website.
- Schedule H (Household Employment Taxes) must be filed with your Form 1040 by April 15, 2022, for the tax year 2021, and April 18, 2023, for the tax year 2022. If you don't have to file a federal tax return, you can just file the schedule. If you file a 1040 extension, the extension will also apply to Schedule H.
When you submit your own Form, you should pay your portion of FICA taxes, as well as any amounts you withheld from your employee's salary, together with any other taxes you may owe. They increase your tax bill. Paying the Social Security Administration directly is not a good idea.
If you're a nanny, you may opt to pay your nanny tax in quarterly anticipated payments throughout the year or ask your employer to boost your withholding to meet these additional taxes. If you wait until April to submit your tax return and it turns out that you owe a nanny tax amount because you didn't pay enough, you could face an underpayment penalty.
Don’t overlook your state obligations
While you're attending to all of these jobs and minutiae, check in with your state. You should check with your state's unemployment tax department to see if you need to pay the unemployment tax for a home employee. When it comes to income tax withholding, it varies from state to state. It is so because - the federal government withholds, certain states, such as Pennsylvania, (exempt household employees from withholding) but you won't know unless you ask.
Frequently Asked Questions (FAQs)
How do you file taxes if you're a nanny?
If you work as a nanny at your employer's house, you are most likely an employee. That implies you must file your taxes in the same manner as any other employee. You'd use the W-2 form issued by your employer to fill out Form 1040. You'll very certainly be required to pay state taxes as well.
Can you claim a nanny on your taxes?
Although you cannot deduct a nanny from your taxes, you may be qualified for the child and dependent care tax credit. The qualifying child must be under the age of 13 and the nanny must be caring for them while you work or look for a job to be eligible for the credit. To be eligible for the credit, you must have an adjusted gross income of $438,000 or less.
