Do You Know About The ‘Nanny Tax?’

pspanDid you know that under current law, any family or individual who pays a household employee more than $2,000 (2016) a year must withhold and pay Social Security and Medicare taxes, also known as FICA. The law mandates that all domestic workers, such as cooks, nannies, housekeepers and gardeners, are subject to this combination of tax types known as the “nanny tax.” Federal unemployment insurance taxes must also be paid if the household pays any number of employees a total of $1,000 or more in a calendar quarter./span/ppspanAs /spana href=https://en.wikipedia.org/wiki/Nanny_Tax target=_blankspanthis entry/span/aspan in Wikipedia notes, the nanny tax is comprised of a combination of taxes you withhold from your employee and the taxes you pay as the employer. Typically, you'll withhold Social Security and Medicare (collectively known as FICA) and federal and state (where applicable) income taxes from your domestic worker/employee each pay period. You'll also pay a matching portion of FICA, as well as federal and state unemployment insurance taxes./span/ppstrongAccording to a href=https://www.care.com/homepay/nanny-tax-guide target=_blankCare.com/a, you, as the employer, in order to properly pay what you owe in nanny taxes and satisfy your obligation, will need to collect the following:/strong/pullipspanstrongID numbers:/strong You need both the federal and state tax identification number in order to report your nanny taxes. You can get your federal employer identification number (FEIN) from the IRS and use this number to obtain your state identification number from the appropriate tax agency in your state./span/p/li/ulullipspanstrongPayroll info:/strong You need to accurately calculate your employee's gross pay, calculate the taxes withheld, and track the corresponding employer taxes each pay period./span/p/li/ulullipstrongForms:/strong/p/li/ululullipspanYou must provide your nanny with a Form W-2 by the end of January each year./span/p/lilipspanYou need to file any required year-end forms with the state (where applicable), as well as Form W-3 and Form W-2 Copy A with the Social Security Administration./span/p/lilipspanYou need to prepare a Schedule H and file it with your federal income tax return./span/p/li/ullipstrongQuarterly filings:/strong/p/liullipspanYou should file state tax returns, typically on a quarterly basis./span/p/lilipspanYou should send 1040 estimated payments to the IRS four times per year./span/p/li/ul/ulpspanThe employee, or nanny, should provide the employer with the /spana href=https://www.care.com/homepay/nanny-tax-guide target=_blankspanfollowing/span/aspan: /span/pullipspanA Social Security number or an ITIN;/span/p/lilipspanA completed Form I-9 with proper identification; and,/span/p/lilipspanA completed federal W-4 form and corresponding state income tax withholding form (if you live in a state with income taxes)./span/p/li/ulh4spanAre there any exceptions to the general rule of who is an employee? /span/h4pspanIf the babysitter is the taxpayer's parent, spouse, or if the babysitter is under 18 and is not primarily engaged in the household employment profession, the nanny tax does not apply. /spana href=https://www.investopedia.com/terms/n/nanny-tax.asp target=_blankspanInvestopedia/span/aspan encourages the use of an agency as another way to avoid the nanny tax pitfall:/span/ppspanAnother way for taxpayers to avoid dealing with the nanny tax is by hiring household help through an agency. The agency will then be the employer and be the one who pays the nanny tax. Also, if household helpers are officially self-employed, they will be responsible for paying their own taxes and the taxpayer will not have to worry about the nanny tax. /span/ph4spanWho else could qualify as an employee for the purpose of the nanny tax? /span/h4pspanIt depends on whether what you’ve paid these people exceeds the applicable dollar threshold. That sweet old lady across the street whom you pay to pick up your child from the school bus stop and watch them for an hour until you get home from work? She counts. So does that gardener you pay for three hours of work three times a month to make sure your lawn stays well manicured./span/ppspanRefer to /spana href=https://www.irs.gov/taxtopics/tc756 target=_blankspanTopic 756/span/aspan, “Employment Taxes for Household Employees,” for additional information on the topic provided by the Internal Revenue Service./span/p