Still have your 2022 nanny taxes to knock off your to-do list?
If you are a new household employer and taking on nanny taxes for the first time, this quick step-by-step guide will take you through the process. Even if you’ve put off anything to do with nanny taxes until now, do not worry.
While it is never too late to get nanny taxes right, you should not delay any longer. You may need to look back at how much you have paid your nanny over the year and there will be some math involved. Plus, some forms and filings are due on January 31.
There is also an easier way if you do not have the time and are dreading tackling your nanny taxes. GTM Payroll Services offers a back-tax service. We will get you caught up quickly and ready to take on the new year without you having to break a sweat.
If you are committed to doing this yourself, here is what you need to do.
1. Assess if you had a household employee
Anyone employed in your home can be considered a household worker. While hiring a nanny is the most popular form of household employment, housekeepers and in-home senior caregivers are also considered domestic workers. With limited availability in daycare centers, you may have joined a nanny share. That makes you – and each family in your nanny share – an employer too.
Let’s also get one other item out of the way. A nanny is an employee and not an independent contractor. You do not give employees 1099s at the end of the year and shift the entire tax obligation to them. You are in control of the employment: establishing a schedule of when your employee will work, dictating how you would like the job done, and providing the tools and equipment to do the job.
Form 1099 is only for payment made in connection with a trade or business. They do not apply to household employment.
2. Verify how much you paid your employee in 2022
If you paid your household employee $2,400 or more in 2022, then you and your worker owe Social Security and Medicare taxes (commonly called FICA taxes). This means your after-school or summer nanny likely earned enough money to clear that “nanny tax threshold.”
If you paid an employee $1,000 or more in any calendar quarter, you are liable for federal unemployment taxes. This is an employer-only tax.
You may owe state unemployment taxes as well. In most states, this is also an employer-only tax. Only in Alaska, New Jersey, and Pennsylvania do employees contribute to state unemployment insurance.
3. Apply for your tax identification numbers
If you determine that you had a household employee and paid them $2,400 or more this year, then you are an employer and need to obtain your federal employer identification number (FEIN). This can be done online so you can get your ID right away. You will need to get set up as an employer with your state as well through a department of revenue or labor agency. Look up your state government websites.
4. Determine what you paid your employee by week
This is an important step and not one to be bypassed thinking you already know the total amount paid to your employee. Why do you need to break it down by week? Because this is where families get in trouble for not paying their workers the right way. Nannies and household employees are protected by the Fair Labor Standards Act (FLSA), which means:
They are required to be paid at least minimum wage. This is the highest hourly wage of the federal, state, and local rates. The federal rate has been stuck at $7.25/hour for quite some time, so your state or local rate (some are as high as $15/hour or more) likely has exceeded that. Check the applicable minimum wage rate for your state and city.
They are also required to be paid at least time-and-half for overtime for hours worked over 40 in a seven-day workweek. California’s overtime rules are a little different and some state laws vary for live-in employees.
They cannot be paid a flat salary to cover all hours worked unless you are guaranteeing hours.
That is why you need to break down your nanny’s pay by week. To make sure they were paid at least the applicable minimum wage for every hour they worked and that they received overtime pay for any hours worked over 40 in a workweek.
4. Calculate your nanny tax obligations
There are two main tax buckets: FICA and unemployment.
FICA taxes are Social Security and Medicare. Both you and your employee contribute 7.65 percent of their gross wages for Social Security (6.2 percent) and Medicare (1.45 percent). You are required to remit both shares of FICA taxes to the IRS. You can do this quarterly with Form 1040-ES so you and your employee do not have to pay this entire sum at tax time. That may be difficult for your employee. It is a good idea to withhold taxes each pay period and remit funds quarterly. That way there are no financial surprises at tax time.
If you owe too much in taxes when you file your personal return, you could be hit with an underpayment penalty.
You could also pay your employee’s FICA taxes for them. This would be considered taxable income for income tax purposes but would not be subject to unemployment taxes or FICA.
Federal unemployment taxes (FUTA) is six percent on the first $7,000 in gross wages. You will likely owe state unemployment taxes as well (SUI). Those rates vary. When you set up as an employer with your state, they will tell you your SUI rate or you can check your state’s rate.
If you pay SUI, you may be able to reduce your FUTA tax rate from six percent to 0.6 percent (essentially cutting your obligation from $420 to $42).
You do not have to withhold income taxes. Household employment is one of the few industries where this is not required. However, it is a good idea to withhold income taxes from your employee’s pay based on their Form W-4. That way they will not owe their entire income tax obligation when they file their personal tax return.
In total, your employer payroll taxes will typically fall between nine and 11 percent of your employee’s gross wages. There are ways to offset some of this cost through the Child and Dependent Care Tax Credit and a Dependent Care FSA.
5. Fill out year-end tax forms
Now it is time for paperwork.
Form W-2 is due to your employee by January 31, 2023. This is no different than the W-2 you receive from your employer. It details wages and taxes withheld. Confirm your employee’s legal name, address, and Social Security number before issuing their W-2. This will help reduce any issues when they file their return.
Also, by January 31, 2023, you will need to mail or electronically file Copy A of Form W-2 and Form W-3 to the Social Security Administration.
6. Complete forms for your personal tax return
Then it is on to Schedule H, which you will file with your personal tax return. We go into detail on how to complete Schedule H in this post.
You may also want to file Form 2441 (Child and Dependent Care Expenses) to get a credit on a portion of your child care expenses like your nanny’s wages.
7. Sign up for your employer’s Dependent Care FSA
Besides getting caught up on 2022 taxes, you may want to take advantage of your employer’s Dependent Care Flexible Spending Account (FSA) if they offer one. You can set aside pre-tax money from your paycheck to help pay the costs of childcare like your nanny’s wages. Learn more about how to use a Dependent Care FSA when paying a nanny.
8. Feel good about doing the right thing
Nanny taxes can be a big hassle especially if you are playing catch-up. But by paying your fair share of taxes you will have fewer worries, reduce stress, and take on less risk. Not to mention you will have a happier employee enjoying the benefits of being paid legally.
GTM can help with your nanny taxes
If the thought of tackling nanny taxes seems intimidating, do not worry. GTM Payroll Services can help. Our team of household employment tax experts help set you up for success in 2023. Call (800) 929-9213 for a complimentary, no-obligation consultation, or schedule time with us at your convenience. We’ll answer your questions, discuss your obligations as a household employer, and show you how GTM Payroll can make nanny taxes easy.
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