Get Your Nanny Taxes Organized for Tax Season

Jan 14, 2020 | GTM Blog, Household Payroll & Taxes

Owe nanny taxes? Here are six steps plus one bonus piece of advice for organizing your nanny taxes and being prepared when you need to file your return.

The clock is ticking but there’s still time to get your nanny taxes organized and ready for tax filing season. Your first deadline is January 31, 2020, so if you haven’t started preparing you should do so now.

Here are six steps plus one bonus piece of advice for preparing your nanny taxes.

1. Determine if you owe nanny taxes

If you paid your household employee more than $2,100 in 2019, then you must pay 7.65 percent in Social Security and Medicare taxes on your employee’s wages. Obviously full-time workers clear this threshold easily and many part-timers will too especially if they worked most of the year. If you hired a nanny for the summer, an after-school caregiver, or an in-home senior caregiver for a short time, you still may have a nanny tax obligation.

Also, if you paid an employee $1,000 or more in any calendar quarter, you’re liable for federal (FUTA) and state unemployment (SUI) taxes. FUTA is six percent on the first $7,000 in cash wages. You may be able to reduce your FUTA tax responsibility based on your SUI contributions.

2. Calculate your nanny tax responsibility

Hopefully, at this point, you know what you owe in nanny taxes and have even been remitting taxes quarterly, so you don’t have to pay your entire responsibility when you file your return. You could also have your employer withhold more from your pay during the year to help cover your nanny taxes when you file.

If you’re starting from scratch, here’s how to get caught up on your nanny tax obligations.

3. Prepare Form W-2 for your employee

Just like employees in the traditional workforce, household workers need to receive Form W-2 by January 31, 2020.

Your employee needs Form W-2 in order to file their own personal tax return. It details their wages and federal income, Social Security, and Medicare taxes that were withheld.

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.

Don’t classify your employee as an independent contractor and issue them a 1099. This is considered felony tax evasion because you’re shifting the entire tax obligation to your employee and that can land you in a lot of trouble. With rare exceptions, the IRS considers household workers to be employees and not independent contractors. That’s because you control the employment relationship by determining when your employee works and how they should do their job as well as providing the tools and equipment to do the job.

You could file Form SS-8 with IRS to determine your employee’s status. But you don’t have a lot of time with Form W-2 due at the end of January.

Independent Contractor or Employee? How to Classify Your Nanny

4. File Form W-2 and Form W-3 with the Social Security Administration

By January 31, 2020, you’ll also need to file Copy A of Form W-2 and Form W-3 (Transmittal of Wage and Tax Statements) with the Social Security Administration.

All employers, including families with household help, need to file Form W-3 to report their employee wages and tax withholdings. Form W-3 form combines wages and withholdings for all your employees. Even if you have just one employee, you’ll still need to file Form W-3.

You send these forms by mail or file them electronically.

More information from the Social Security Administration on filing forms W-2 and W-3.

5. Take advantage of the Child and Dependent Care Tax Credit

You may be able to claim a portion of your employee’s wages for the Child and Dependent Care tax credit (Form 2441). The person being cared for must be a dependent who is under 13-years old or a spouse or dependent who is physically or mentally incapable of self-care. There is no age limitation for spouses and other dependents. However, they must have lived with you for more than half the year.

To qualify, you must have incurred these expenses so you could work or look for work. The total expenses you can claim with the Child and Dependent Care Tax Credit is $3,000 for one child/dependent and $6,000 for two or more children/dependents. The credit is 20 percent for anyone earning $43,000 or more. That means the potential maximum credit is $600 (20 percent of $3,000) for the care of one person and $1,200 for two or more children/dependents.

If you contributed to a Dependent Care FSA through your employer, expenses reimbursed through that account can’t be used for the Child and Dependent Care Tax Credit. The credit will only be applicable to the expenses that exceed your client’s Dependent Care FSA contributions.

For example, if you have two children and contributed $5,000 to a Dependent Care FSA, you could apply $1,000 to the Child and Dependent Care Tax Credit before you hit the $6,000 maximum for the tax credit.

On Form 2441, you must provide your caregiver’s name, address, and Taxpayer Identification Number (in the case of household employees, this would be their Social Security Number).

You can’t claim the credit if the caregiver was your spouse, a parent of the dependent child, a dependent listed on your tax return or your child who is age 18 or younger.

Some states may also offer a similar credit for child and/or dependent care.

6. Get familiar with Schedule H

Schedule H (Household Employment Taxes) gets filed with your personal tax return. This is where you will report the household employment taxes – Social Security, Medicare, and federal unemployment taxes – that are owed for the tax year. You’ll enter the cash wages you paid to your employee and calculate what you owe in nanny taxes. You’ll also need to know how much you contributed in state unemployment taxes as you may be able to significantly reduce the amount owed in FUTA taxes. Finally, you’ll include the amount owed in nanny taxes from Schedule H to your Form 1040.

Bonus: Call GTM Payroll Services and avoid tax-time hassles

The easier way is to let GTM Payroll Services manage it all for you. Skips the hassles of calculating taxes and filing forms and stop worrying if you’re doing it right or not. We’ll handle paying your employee with direct deposit, withholding and remitting all taxes, and filing/preparing year-end forms. All with the best client service in the business. Call (800) 929-9213 for a free, no-obligation consultation with a household employment expert.