The Social Security Administration recently determined the nanny tax threshold to be $2,600 for 2023.
It’s the first time since the nanny tax threshold was tied to the national wage index in 1994 that this threshold has jumped by $200 year-over-year.
In years past, the nanny tax threshold has either remained flat or increased by $100. It’s also the fourth consecutive year that the threshold has seen a boost.
If a household employee – like a nanny, housekeeper, or in-home senior caregiver – earns $2,600 or more in cash wages in 2023, Social Security and Medicare taxes (or FICA taxes) must be paid by the family and the worker.
Earnings below this threshold aren’t taxable under Social Security.
While most full- and part-time household employees will exceed the nanny tax threshold, temporary or seasonal domestic workers like summer and after-school nannies can easily reach that threshold and trigger nanny tax compliance.
The nanny tax threshold does not apply to wages paid to a spouse, a child under the age of 21, a parent, or any employee under the age of 18.
Social Security and Medicare taxes are 15.3 percent of an employee’s cash wages. The employer (family) pays 7.65 percent (Social Security at 6.2 percent and Medicare at 1.45 percent) while the same amount can be withheld from the employee’s pay, or the family can pay their worker’s share and not withhold.
Families may also owe federal and state unemployment taxes. If a household employee is paid $1,000 or more in any calendar quarter, the family needs to pay federal unemployment taxes of six percent on the first $7,000 in wages. State unemployment tax rates vary. This is an employer-only tax. Wages paid to a spouse, a child under the age of 21, or a parent do not count toward unemployment taxes.
For most industries, there is no employment coverage threshold, so every dollar of wages is covered by Social Security and taxable.
Household employment is one of the few industries with an employment coverage threshold. This amount is set every year in October by the SSA. For household employees, it changes with the national average wage index.
Introduced by the Social Security Domestic Employment Reform Act of 1994, the current version of the nanny tax threshold aimed to simplify employment taxes on domestic services. The law also coordinated remitting nanny taxes with the collection of income taxes.
The threshold for 2023 was calculated by multiplying the 1995 threshold ($1,000) by the national average wage index for 2021 ($60,575.07) and then dividing it by the 1993 national average wage index ($23,132.67). The result of this calculation is rounded down to get to $2,600.
GTM can help
Nanny taxes can be time-consuming and a big hassle. Spend your time doing something – anything else – then figuring out your nanny taxes. Let the household employment experts at GTM Payroll Services manage nanny taxes and payroll for you. We will set you up as an employer, get your employee paid the right way, and remit all employee and employer taxes to federal and state agencies. It really can be that easy. Questions about hiring or employing a nanny? Want to learn more about our services? Call (800) 929-9213 for a complimentary, no-obligation consultation. Or schedule time with us at your convenience.
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