How to Catch up on Nanny Taxes in 8 Steps

Jan 5, 2024 | GTM Blog, Household Payroll & Taxes, Tax Season

Whether you put off nanny taxes until now or are just realizing you have a household employment tax obligation, now is the time to catch up on your nanny taxes. While it is much easier to track nanny tax withholdings with each pay period, you can “catch up” at the end of the year. It will take a little more time and effort on your part. Here’s how to catch up on your nanny taxes as you prepare your 2023 taxes.

Whether you put off nanny taxes until now or are just realizing you have a household employment tax obligation, now is the time to catch up on your nanny taxes. You will need to have your nanny taxes ready before you file your personal tax return and some year-end forms are due by January 31, 2024.

While it is much easier to track nanny tax withholdings with each pay period, you can “catch up” at the end of the year. It will take a little more time and effort on your part. Here’s how to catch up on your nanny taxes as you prepare your 2023 taxes (filing by April 15, 2024).

1. Verify if you have a household employee

Household employees are more than just nannies. Although in-home child caregivers are the most popular type of household workers, senior caregivers and companions, personal assistants, housekeepers, chefs, chauffeurs, estate managers, private educators, tutors, and others can be considered employees of your family.

Recently, nanny shares – where two or more families hire a nanny for childcare in one of the family’s homes – have become popular alternatives to daycare centers. Nannies working for families in a nanny share are also considered household employees.

Seasonal or temporary employees – like a summer or after-school nanny – can also be considered household workers.

As long as that employee made at least $2,600 in 2023, you will have a nanny tax obligation (Social Security, Medicare, and potentially other responsibilities). Or if an employee made $1,000 in a calendar quarter you will owe federal – and possibly state – unemployment taxes.

You do not have to consider your spouse, a child under age 21, a parent, or any employee under the age of 18 at any time in 2023 as a household employee for reporting Social Security and Medicare taxes.

For federal unemployment taxes, do not count wages you paid to your spouse, a child under the age of 21, or a parent.

2. Obtain your tax identification numbers

If you have not done so already, you will need to get your federal employer identification number (FEIN) and state tax ID. Obtaining an FEIN can be done online. For your state, look up your state government website and follow the steps to get your tax ID.

3. Calculate what your nanny earned each week

Under the Fair Labor Standards Act, household employees are required to be paid by the hour and at least the prevailing minimum wage rate for your state or locality. They also receive time and a half for hours worked over 40 in a workweek.

It is important to break down your employee’s pay and hours worked by week to make sure they were paid at least minimum wage and compensated with overtime pay when applicable.

4. Establish your nanny tax obligation

You have two main tax responsibilities when you have a household employee like a nanny.

There are Social Security and Medicare, commonly called FICA taxes. Both you and your employee contribute FICA taxes, which is 7.65 percent of gross wages (Social Security at 6.2 percent and Medicare at 1.45 percent). If you have not been remitting these taxes every quarter, you will owe the entire amount when you file your personal tax return. Your employee will also owe their share of FICA taxes when they file unless you pay them on their behalf.

Then you have federal unemployment taxes (FUTA), which are six percent on the first $7,000 of gross wages. If you pay state unemployment taxes (SUI), you can likely reduce your FUTA tax rate to 0.6 percent, essentially cutting your obligation from $420 to $42. When you are set up as an employer in your state, they will provide your SUI rate.

5. Complete year-end nanny tax forms

Now we can get to the paperwork.

First, you will need to provide your employee with Form W-2 by January 31, 2024. Before issuing their Form W-2, confirm your workers’ legal name, address, and Social Security number. This will help reduce any errors when your employee files their return.

If you decide to pay your employee’s FICA taxes for them, this would be considered taxable income for income tax purposes on their Form W-2 but would not be subject to unemployment taxes or FICA.

Household workers are considered employees and not independent contractors so they should not receive a 1099 at tax time. In short, this is because you – as the employer – provide instruction to your employee, set their schedule, and provide the tools and equipment for them to do their job. Failing to classify your household worker properly can be considered federal tax evasion because independent contractors are responsible for both the employer and employee shares of FICA taxes and the employer avoids unemployment taxes.

Form W-3 and a copy of Form W-2 must be filed with the Social Security Administration by January 31, 2024.

6. File Schedule H with your personal tax return

When you are completing your personal tax return, attach Schedule H (Household Employment Taxes). This is where you report your household employment taxes to the IRS.

Before completing Schedule H, be prepared with this information:

Your name, Social Security Number, and Employer Identification Number (EIN)
Total wages paid to your household employees
Federal income tax withheld
State unemployment contributions

If you are paying your entire nanny tax obligation when you file your personal tax return, you may wind up owing too much in taxes and be hit with an underpayment penalty. Going forward, remit your nanny taxes quarterly using Form 1040-ES.

In total, your employer payroll taxes will typically fall between nine and 11 percent of your employee’s gross wages.

7. Take the Child and Dependent Care Tax Credit

Household employers who pay their nanny legally can take advantage of the Child and Dependent Care Tax Credit by filing Form 2441 with their personal tax returns. A nanny’s wages is considered a qualified expense. You can have up to $3,000 in expenses for one child or $6,000 for two or more children. Typically you can claim 20% of your care expenses ($600 for one child or $1,200 for two or more children). Since this is a tax credit, you’ll directly reduce your taxes, dollar for dollar.

8. Take a deep breath

You got this! It is far better to do the work now to get caught up than to ignore your obligations and risk getting caught not paying your nanny taxes. That can result in thousands of dollars in fines, penalties, interest, and payment of back taxes.

Now let’s think about doing it right in 2024. If you plan to do it yourself, download our free Complete Guide to Household Payroll which will help you with all your household employer tax, wage, and labor responsibilities. The IRS estimates that it takes families about 60 hours annually to keep up with nanny taxes.

If you think you have better uses for that time, then give GTM Payroll Services a call. We will take care of paying your nanny with direct deposit, automating withholdings, and remitting your taxes. Give us a call at (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert, or schedule time with us at your convenience.