It is that time of year again when millions of Americans start piecing together their 2020 tax information to file their personal tax returns by the April 15, 2021 deadline. Household employers – families that have hired nannies, senior caregivers, private teachers, housekeepers, and other in-home help – need to make sure they are up to date on what is commonly referred to as “nanny taxes.” These are the employment taxes families and their workers report when they file their tax returns. It can get complicated and time-consuming especially if you have not been keeping track of hours and pay or remitting taxes quarterly. The COVID-19 pandemic has added another layer of complexity if your employee took paid leave for qualified reasons related to the health crisis and you took – or want to take – the tax credits. We will walk you step-by-step through the process as you prepare to file your nanny taxes for 2021.
Before you begin
Let’s get a couple of things out of the way first.
Nanny tax threshold
A household employee needed to have earned at least $2,200 in gross wages in 2020 for nanny taxes to apply. If they made below that threshold then Social Security and Medicare taxes (FICA) do not need to be paid by the employee or the family. The worker should still get a W-2 as they will need to report their wages as income, and you can still apply for the Child and Dependent Care Tax Credit.
You do not need to pay or withhold FICA taxes if your employee was your spouse, child under age 21, parent, or anyone under the age of 18 at any time in 2020.
You will owe federal unemployment taxes (FUTA) if you paid a household employee total cash wages of $1,000 or more in any calendar quarter of 2020. Wages paid to your spouse, child under the age of 21, or parent do not count toward federal unemployment.
Nannies, senior caregivers, housekeepers, and other household workers are considered employees and not independent contractors. You control their employment by setting their schedule, defining their job responsibilities, and providing them the tools and equipment to do their jobs. That means they should receive a Form W-2 and not a 1099 at tax time. Misclassification is considered tax evasion, can lead to fines and penalties from the IRS and state tax agencies, and is an easy way for families to get caught skipping their tax obligations.
Nanny shares and learning pods
If you formed a nanny share or learning pod with other families during the pandemic, then each family is considered an employer and should give the nanny or private teacher a W-2 and file Schedule H with their personal tax returns. Nanny shares have been a popular form of childcare since the pandemic started as a way for families to create a “bubble” for their children. A single caregiver would look after children from multiple families in one of the family’s homes. With online learning common for many school-aged children, families also formed learning pods, which are similar to nanny shares but with a privately-hired teacher supervising virtual learning.
Information you will need
Some of the items you will need to know as you file your nanny taxes in 2021 include:
- Your employee’s social security number, name, address, and zip code
- Your Employer Identification Number (EIN)
- Total wages paid to your household employee
- Social Security and Medicare taxes withheld
- Federal income tax withheld (if any)
- Federal and state unemployment contributions
- Paid leave provided tax credits received under the Families First Coronavirus Response Act (FFCRA)
What you may owe in nanny taxes
FICA taxes are 15.3 percent of cash wages. Both you and your employee contribute 7.65 percent. This breaks down to 6.2 percent for Social Security and 1.45 percent for Medicare.
Federal unemployment tax is six percent on the first $7,000 of cash wages (or a max of $420). This is an employer-only tax.
State unemployment (SUI), which varies by state, is also an employer-only tax.
If you pay state unemployment taxes, you may be able to reduce the amount you owe in federal unemployment to as low as 0.6 percent or a max of $42. Your credit will be determined when you complete Schedule H.
Your employee will owe federal income tax and state and local income taxes if applicable. Withholding income taxes is optional for household employers. However, we recommend providing your employee with Form W-4 at the start of employment and withholding income taxes per pay period. That way they do not owe their entire obligation when they file their tax return.
If you paid an employee $200,000 or more, then they are subject to Additional Medicare Tax withholding. This is an extra 0.9 percent on top of the 1.45 percent for Medicare for a total of 2.35 percent on any wages above $200,000.
Steps to filing your nanny taxes
1. Provide your employee with a Form W-2
Employees should receive their W-2 by February 1 (typically this deadline is January 31 but that date falls on a Sunday this year so the following day is the due date). Form W-2 will indicate their wages and taxes you withheld from their pay including Social Security, Medicare, federal income, and any state or local income taxes.
New for this tax season is reporting any qualified paid leave provided to your employee under the Families First Coronavirus Response Act (FFCRA) on Form W-2. Employers are required to report FFCRA leave compensation in either Box 14 of Form W-2, or in a statement provided with the form.
In 2020, household employers were required to provide their workers with up to 80 hours of paid sick leave and up to 10 weeks of partially compensated leave under the Family and Medical Leave Act for specified reasons relating to COVID-19.
2. Submit Form W-3 with the Social Security Administration
Also, by February 1, you need to submit Form W-3 (Transmittal of Wage and Tax Statements) and Copy A of each employee’s Form W-2 with the Social Security Administration. Form W-3 is a summary of all your employee wages and contributions from the previous year. This can be done electronically.
3. Complete Schedule H
Household employers need to attach Schedule H with their personal tax returns that are due by April 15. Schedule H is where you report employment taxes if you paid cash wages to a household employee that were subject to Social Security, Medicare, or FUTA taxes, or if you withheld federal income tax.
There is an added twist in filing Schedule H this year. You will need to reconcile any pandemic-related paid leave you provided employees and tax credits you received on this form.
4. Enter estimated tax payments
Remember, if a payroll service is remitting taxes on your behalf each quarter, you will count those as estimated tax payments on Schedule 3.
It is a good idea to withhold taxes each pay period and remit both the employer and employee tax amount each quarter with Form 1040-ES. That way you and your employee are not stuck with your entire tax obligation when you file your personal returns.
Also, since household employment taxes are added to your personal tax obligation, you may have to pay an estimated tax underpayment penalty if you don’t pay your household employment taxes during the year. Another option is to have additional federal income tax withheld from your wages during the year.
5. Complete the Child and Dependent Care Tax Credit
Your employee’s wages may be a qualifying expense for the Child and Dependent Care Tax Credit.
You may be able to claim this credit if you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work.
The amount of the credit is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income.
The total expenses that you may use to calculate the credit may not be more than $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals).
If you received dependent care benefits that you exclude or deduct from your income (such as through a Dependent Care FSA from your employer), you must subtract the amount of those benefits from the dollar limit that applies to you.
A qualifying individual for the child and dependent care credit is:
- Your dependent qualifying child who was under age 13 when the care was provided,
- Your spouse who was physically or mentally incapable of self-care and lived with you for more than half of the year, or
- An individual who was physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (a) was your dependent; or (b) could have been your dependent except that he or she received gross income of $4,300 or more or filed a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer’s 2020 return.
This credit is a percentage of your qualified expenses ranging from 20 percent to 35 percent. Those with higher incomes will see a smaller percentage (and smaller credit). However, there is no upper limit on income for claiming the Child and Dependent Care Tax credit.
GTM can help
If you would like to make paying your nanny easy in 2021 and tax time even easier in 2022, then you need to call GTM Payroll Services at (800) 929-9213. We take care of payday with automatic payroll deductions and withholdings as well as free direct deposit for your employee. We will remit federal, state, and local taxes on your behalf throughout the year and offer a year-end service that includes Form W-2, Form W-3, and Schedule H. Want to learn more? Have questions about taxes or paying your employee? Call us and get a complimentary, no-obligation consultation with a household employment expert.
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