The following are the most frequently asked questions (FAQs) from household employers.
What is the nanny tax?
Answer – The nanny tax refers to the employment taxes paid when a family or individual hires someone to work in their home. This is typically a nanny who looks after children but also includes in-home senior care workers, housekeepers, household managers, butlers, and drivers. Household employees and their employers pay Social Security and Medicare taxes on the worker’s wages. Employees also pay federal and state (if applicable) income taxes. Employers pay federal and state unemployment taxes. Essentially, for tax purposes, household employees are treated the same as traditional employees.
As a household employer, do I have to pay taxes on my employee?
Answer – Yes. As a household employer, if you pay cash wages of $2,600 or more in 2023 (or $2,400 in 2022) to your employee, you must withhold Social Security and Medicare taxes. Employers are not required to withhold federal and state income taxes unless it is agreed upon by both parties. If income taxes are not withheld throughout the year, your nanny will be responsible for paying them at the end of the year. If you pay a total of $1,000 or more per quarter to a household employee you must pay federal unemployment tax. This does not apply if your household employee is your spouse, child under age 21, parent, or any employee under the age of 18 at any time in the current tax year.
How much will I owe in nanny taxes?
Answer – You are responsible for paying 7.65 percent of your employee’s gross pay in Social Security and Medicare taxes, which you can remit quarterly. Your employee will be responsible for the same amount, which is required to be withheld from their pay each pay period. Each of you will pay 6.2 percent towards Social Security and 1.45 percent to Medicare. Your employee will also owe income tax.
You will also pay FUTA (federal unemployment tax), which is six percent of wages up to $7,000 in earnings as well as state unemployment taxes, which vary by state. Your employee is not responsible for unemployment taxes.
Can I file nanny taxes on my own?
Answer – The IRS estimates that it takes a household employer 60 hours each year to comply with all federal and state tax laws. It can get complicated and time-consuming. You’ll need to adhere to all applicable federal and state tax, labor, and wage laws like the Fair Labor Standards Act, paid sick and family leave programs, and domestic worker protection laws. Some household employers rely on their accountant or a firm like GTM Payroll Services to handle payroll processing and tax filings.
Before handling nanny taxes and payroll on your own, we suggest you visit The Complete Guide to Household Payroll. This guide will help you every step of the way and explain what you need to do and why. There’s even a handy checklist and payroll calendar at the end of the guide to use as references.
However you proceed, it’s important to do it the right way. There can be steep financial consequences if you fail to properly pay your nanny taxes.
My friends pay their employees off the books. Can I?
Answer – According to IRS Publication 926, employers must withhold taxes if their employee earns $2,400 or more in 2022 (or $2,300 in 2021). It is each individual employer’s responsibility to withhold taxes accordingly. GTM Payroll Services strongly recommends that you review the tax laws regarding household employment.
What are the risks of non-compliance?
Answer – Not paying payroll taxes could result in hefty fines and penalties, and possible legal action by your employee. It’s not that difficult to get caught. Your nanny files for unemployment, gets hurt on the job, or sues you for not paying at minimum wage or overtime. Paying your nanny “under the table” and getting caught could also trigger an IRS audit. Not paying proper taxes can also derail career opportunities and not just for government positions. For jobs that require a government security clearance, you’ll be asked if you failed to pay any taxes when required by law.
My nanny is not a U.S. citizen. Do I still need to pay nanny taxes?
Answer – For tax purposes, you’ll treat a noncitizen who is your employee the same as if they were a citizen. However, only noncitizens authorized to work in the U.S. by the Department of Homeland Security can get a Social Security number and be eligible for employment.
Can I treat my household employee as an independent contractor?
Answer – No. There are specific differences between an employee and an independent contractor. An employee is a person who takes instruction from the employer, has a schedule set by the employer, and uses tools and equipment provided by the employer. An independent contractor is a person who works under their own conditions, sets their own schedule, and uses their own supplies. Nannies who work in an employer’s home, whether it be on a temporary or full-time basis, are considered household employees, not independent contractors because they work under the family’s control and have their schedule and pay set by the family. In the past, the IRS has made determinations that caregivers are considered employees and it is illegal for a family to treat them as independent contractors.
Does my household employee receive a 1099 or W-2?
Answer – Nannies, housekeepers, in-home senior care providers, and other household workers are considered employees and not independent contractors. They should receive Form W-2 by January 31. You will also need to file Copy A of Form W-2 and Form W-3 with the Social Security Administration by the same date.
I own a business. Can I put my household employee on my payroll?
Answer – No, it is illegal to pay your household employee on your business payroll. A household worker is an employee in your home, not your business. Therefore, you would not qualify to take the tax deductions which you would be allowed to take with a traditional business employee.
In most cases, federal household employment taxes must be paid on the employer’s personal federal income tax return, either annually or quarterly. The only exception to reporting federal household employment taxes on the employer’s personal federal income tax return is if they are a sole proprietor or if their home is on a farm operated for profit. In either of these cases, the employer may opt to include federal household employment taxes with their federal employment tax deposits or other payments for the business or farm employees. For more information, refer to IRS Publication 926.
Should I talk to my employee in terms of gross pay or net pay?
Answer – It’s always best to talk in terms of gross pay for several reasons:
- Your employer taxes are based on top of the gross wages, making budgeting easier
- Tax tables change on average once a year, so there is no guarantee that the net that you agree on with the employee will remain the same
- Overall, it is less costly for you to speak in terms of gross pay because your employee’s taxes are deducted from the gross wages rather than being added on top of the net.
Can you explain the specifics of a nanny share?
Answer – Families love the benefits of a nanny share as they enjoy personalized, in-home care for their children while sharing the costs with another family. In a nanny share two (or more) families hire a nanny who typically cares for children in one of the family’s homes. Before getting started on your nanny share, read How to Set Up a Nanny Share for steps and best practices for setting up and maintaining successful relationships with your nanny share family and nanny.
What if my employee cannot provide documents for the I-9 form?
Answer – As the employer, it is your responsibility to receive a signed Form I-9 from your employee no later than the first day of employment. Documents that establish a worker’s identity and employment authorization must be presented within three business days of employment. It is also your responsibility to review the documents received from your employee. The documents must reasonably appear to be genuine and relate to the employee. If your employee is unable to provide documents to support their work authorization, you should not hire them. If you are unsure of the eligibility of your employee, you can always verify the information they have provided using the E-Verify program at www.uscis.gov.
Am I required to pay overtime?
Answer – According to the federal Fair Labor Standards Act (FLSA), employers are required to pay household workers overtime pay of at least one and a half times their regular pay rate. Overtime pay must be paid for work over 40 hours per week. However, some live-in nannies are exempt from overtime depending on the state in which they are employed.
Employees hired to provide babysitting services on a casual basis, or to provide companionship services for those who cannot care for themselves because of age or infirmity, are exempt from the FLSA’s minimum wage and overtime requirements, whether or not they reside in the household where they are employed.
State and local laws for overtime vary and may supersede the FLSA. Consult a household employment expert at GTM Payroll Services for more information by calling (800) 929-9213, or contact your state’s Department of Labor for your state’s specific laws. A household employer should specify in their work agreement when approved overtime can occur and what the specific rate of pay will be to avoid conflicts when issues arise. Estimate these costs using GTM’s Overtime Rate Calculator.
How do I pay my nanny taxes?
Answer – You’ll need to file Schedule H with your personal tax return. This form is used to report household employment taxes on wages subject to Social Security, Medicare, FUTA, and any federal income tax withheld from your employee’s pay.
If you haven’t been doing so, you may want to remit your taxes quarterly using Form 1040-ES. This will help spread your tax burden over the course of the year rather than as a lump sum at the end of the year.
What tax forms do I need to file my taxes?
Answer – First, you’ll want to confirm your employee’s legal name, Social Security Number, and current address. These are needed to distribute Form W-2 to your employee as well as Copy A of the W-2 and Form W-3 to the Social Security Administration.
To file Schedule H, you’ll need:
- Your Employer Identification Number (EIN)
- Total cash wages you paid to your employee
- Amount of federal income tax you withheld from your employee’s pay
- Amount you paid in state unemployment taxes
If you want to take advantage of the Child and Dependent Care Tax Credit, you’ll need Form 2441.
I’ve paid my nanny cash throughout the year. How do I file nanny taxes?
Answer – First, it’s illegal to pay your nanny in cash or check without documentation of pay rate, hours worked, taxes withheld, and more provided to your employee on payday.
Hopefully, you’ve kept track of your nanny’s wages for the year. If you have their gross wages, you can use a nanny tax calculator and begin to calculate what you and your employee owe in taxes. Time is of the essence as Form W-2 must be provided to your employee and the Social Security Administration by January 31. You and your employee should be prepared to take on a hefty tax bill as well. Since you haven’t been withholding taxes during the year, the entire tax amount is due by April 15.
Make it a point to follow federal and state tax, wage, and labor laws when it comes to paying your nanny. It’s recommended to withhold taxes from each paycheck and remit employee and employer taxes on a quarterly basis.
Am I required to provide vacation or other paid time off to my employees?
Answer – While vacation and other paid time off is not a requirement, it is a popular benefit provided to household employees and is a major contributor to job satisfaction, according to many nannies. All time-off payments should be agreed upon by the employer and employee prior to hiring and should be clearly defined in both the work agreement and employee handbook.
Do I have to provide worker's compensation insurance?
Answer – Many states require household employers to carry a workers’ compensation policy depending on whether your employee works part-time or full-time. Workers’ compensation will help an employee who is injured on the job recover lost wages and pay medical expenses. Even if your state does not require it, GTM Payroll Services strongly advises you to obtain coverage for your employee. GTM is a licensed insurance broker that specializes in setting up workers’ compensation policies for household employers. Contact us at (800) 929-9213 to explore your options and see if GTM can help you in obtaining workers’ compensation.
What tax breaks do I receive?
Answer – There are two main tax breaks that can offset your employer tax costs. If you are legally employing someone in your home (paying “on the books”), you will be able to take advantage of the following tax breaks:
- Dependent Care Assistance Program (DCAP) – Most companies provide this benefit that allows their employees to contribute up to $5,000 of pre-tax earnings to a Dependent Care Assistance account. You would then be reimbursed these tax-free funds to cover childcare expenses like the wage paid to a nanny.
- Child and Dependent Care Tax Credit – Youcan also claim the Child and Dependent Care Tax Credit (Form 2441) on your personal income tax return at year-end. You can claim up to $3,000 of the un-reimbursed qualifying child care expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. The credit can be anywhere from 20 percent to 35 percent of your qualifying expenses.
* The information contained within these FAQs for household employers is designed to give the user general guidelines on the subject of household employment taxes. Tax laws can vary considerably from different taxpayers based on the circumstances and the state of residency. This information is not designed to serve as legal, accounting, or tax advice. GTM Payroll Services encourages you to consult with a competent tax advisor concerning specific matters before making any decisions. GTM does not accept any responsibility for positions taken by taxpayers for any interpretations of the information found within.
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