Employed a household employee like a nanny, housekeeper or in-home senior caregiver this year? Put off your nanny tax obligations?
With tax time fast approaching, tax forms and filings will be due soon.
Perhaps you haven’t had time to figure out your nanny taxes. Maybe you found it too complicated. Or you decided skipping your nanny tax responsibility is too great of a risk. Not to mention that non-compliance can put a serious dent in your finances.
Whatever the reason, here’s how to get caught up when you’re behind on your nanny taxes.
Determine if you owe nanny taxes
If you paid your household employee $2,100 or more in 2019, then you and your worker owe Social Security and Medicare taxes (commonly called FICA taxes).
If you paid an employee $1,000 or more in any calendar quarter, you’re liable for federal and state unemployment taxes as well. This is an employer-only tax.
It’s clear that employing a full- or part-time household worker will mean you have a nanny tax obligation. However, even seasonal or temporary employees can easily exceed the employment coverage threshold. Your summer or after-school nanny may earn enough to trigger a nanny tax responsibility.
Figure out your employee’s hours worked … by week
Hopefully, you’ve at least kept track of your employee’s hours and kept those records. This is an important first step and not being paid properly for hours worked is a big reason why families get sued by disgruntled employees.
Once you have determined hours worked by week, make sure you have been paying your employee at least the applicable minimum wage rate. Household employees are protected by the Fair Labor Standards Act (FLSA) and must be paid hourly and at least minimum wage. They can’t be paid a flat salary unless you’re guaranteeing hours.
The federal rate, which has remained unchanged for years, is $7.25/hour. However, many states, counties, and cities have higher rates than the federal minimum wage. The highest rate applies. For example, if you live in California, your employee is entitled to the state minimum wage of $11/hour (assuming you have fewer than 25 employees). However, if you live in San Diego, the city’s minimum wage rate of $12/hour applies or San Francisco and its’ $15/hour rate.
Why do hours need to be counted by week? Because household employees also receive at least time and a half for hours worked over 40 in a seven-day workweek.
This varies by state for live-in employees. Some states may not require an overtime rate for live-in workers. Check for the specific household employment rules in your state. California also has different overtime rules.
Bottom line, ensure you’ve been paying your employee at least the applicable minimum wage rate and have accounted for overtime hours.
Calculate employer and employee tax obligations
Let’s start with the FICA taxes.
Both you and your employee will contribute 7.65 percent of gross wages for Social Security (6.2 percent) and Medicare (1.45 percent).
By waiting until the end of the year, you and your employee will owe this entire sum when you file your tax returns. That may be difficult for your employee. It’s a good idea to withhold taxes each pay period and remit funds quarterly. That way there are no financial surprises at tax time. You could also pay your employee’s FICA taxes for them. This would be considered taxable income for income tax purposes but wouldn’t be subject to unemployment taxes or FICA.
As for unemployment taxes, you would owe six percent on the first $7,000 of gross wages in federal unemployment (FUTA). You’ll likely owe state unemployment taxes (SUI) as well. Often, you can significantly reduce your FUTA obligation when you pay SUI. Check your state’s SUI rate.
Some states have enacted paid family and medical leave laws. These regulations also apply to household employers and may require contributions from you and/or your employee. Either way, you’re responsible for remitting these payments to your state.
You aren’t required to withhold income taxes from your employee’s pay. They’ll still need to pay their income tax if they owe but you don’t need to take this out of their wages or remit with the other taxes. Again, it’s a good idea to withhold income taxes along with FICA taxes so your employee isn’t stuck with their entire tax bill when they file their return. If you decide to withhold income taxes, provide your employee with Form W-4.
Complete year-end tax forms
Once you’ve figured out all your calculations, it’s time for the paperwork.
You’ll need to provide Form W-2 to your employee before January 31. It’s a good idea to confirm your employee’s correct legal name, Social Security number, and address before issuing Form W-2. That can eliminate some problems when your employee files their tax return.
Send or electronically file Copy A of Form W-2 and Form W-3 to the Social Security Administration by January 31.
You’ll need to complete Schedule H and file it with your personal tax return. 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.
Sign up for your employer’s Dependent Care FSA
If your employer offers a Dependent Care Flexible Spending Account (FSA), you can set aside pre-tax dollars to help pay for the cost of child care like the wages you pay a nanny. Learn more about how to use a Dependent Care FSA when paying a nanny.
Resolve to be a better household employer in 2020
Playing “nanny tax” catch up at the end of the year is no fun. It can be a lot of work at a time of year that is already crazy and when free time should be spent enjoying the season with your family.
It doesn’t have to be that way. By staying on top of your nanny tax and employer responsibilities throughout the year, you’ll have fewer worries, reduce stress, and take on less risk. Not to mention you’ll have a happier employee enjoying the benefits of being paid legally.
Check out our nanny tax guide for everything you need to know to be compliant.
GTM can help with back tax work
If the thought of tackling a year’s worth of nanny taxes seems intimidating, don’t worry. GTM Payroll Services can help. Our team of household employment tax experts can take care of it for you at a low rate. Call (800) 929-9213 to learn more or get started.
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