When budgeting for a nanny, there are a few items to consider. Your nanny’s wages, possible overtime, coverage when your nanny is taking paid time off or a sick day, and benefits all count toward the overall cost of having in-home childcare. Nanny taxes and other employer responsibilities are also factors. But how much are nanny taxes? What can you expect to pay?
While all household employers pay taxes to the IRS, your total nanny tax obligation will depend on your state. Let’s break it all down so you can understand how much you may pay in nanny taxes.
What are nanny taxes?
Nanny taxes is the umbrella term used to describe a household employer’s financial obligation to the IRS and state tax agency when they hire someone to work in their home. While they are called “nanny taxes,” this can apply not only to nannies but to in-home senior caregivers, housekeepers, chefs, chauffeurs, estate managers and staff, and anyone else who works for a private family.
Nanny taxes include Social Security, Medicare, and federal and state unemployment taxes. Depending on your state, you may also owe workers’ compensation and/or paid family or medical leave.
Most household employers pay about 9-12 percent of their worker’s gross wages in nanny taxes.
Social Security and Medicare
The biggest chunk of a household employer’s nanny taxes comes from Social Security and Medicare – commonly called FICA taxes. This accounts for 7.65 percent of your nanny’s gross wages – 6.2 percent for Social Security and 1.45 percent for Medicare. For a nanny who makes $30,000 a year, your FICA tax obligation will be $2,295. Your nanny will owe to the same amount, which you can withhold from their wages or pay on their behalf.
Federal unemployment taxes (FUTA) are six percent on the first $7,000 of your nanny’s wages. Although, if you pay into your state’s unemployment you may be able to reduce this to 0.6 percent. So at most you’ll pay $420 in FUTA and at the very least $42. This is an employer-only tax.
Every state sets its unemployment tax rate (SUI) and a wage base. As an example, in Massachusetts, a new employer pays 2.42 percent in state unemployment taxes on the first $15,000 in wages (the state’s wage base). That works out to be a maximum of $363 you would pay for state unemployment taxes. While every state is different, you can expect to pay a few hundred dollars in SUI. Check out our state-by-state nanny tax guides to understand your obligations. As with FUTA, state unemployment is an employer-only tax. Only in a few states – Alaska, Pennsylvania, and New Jersey – will your employee also contribute to state unemployment insurance.
Nanny tax calculator
Our free nanny tax calculator can help you estimate your tax obligations as an employer. Your nanny can also use the tool to determine their net pay, which is what they will take home after taxes are withheld from their wages.
Many states require household employers to carry workers’ compensation insurance. This helps cover your nanny lost wages and medical expenses if they get hurt or become ill on the job. While costs vary by state, a workers’ compensation policy is typically a few hundred dollars annually.
Check if you need workers’ compensation coverage in your state.
Paid family and/or medical leave
A number of states have now enacted paid family and/or medical leave programs that cover household employment. Depending on your state’s arrangement, you and/or your employee may pay a small percentage of their wages into a paid family and/or medical leave program.
Check out our state-by-state nanny tax guides to understand your possible obligations.
Nanny taxes for family, employee
So let’s recap. The family’s nanny tax responsibility will include:
- Social Security and Medicare
- Federal unemployment
- State unemployment
- Workers’ compensation (if required in your state)
- Paid family or medical leave (if employer contributions are required in your state)
A household employee will owe:
- Social Security and Medicare
- Federal income tax
- State and/or local income taxes (if applicable)
- Paid family or medical leave (if employee contributions are required in your state)
An employee may also owe state unemployment insurance (Alaska, Pennsylvania, and New Jersey) and/or disability insurance (California, Hawaii, New Jersey, New York, and Rhode Island).
How to reduce your nanny taxes
Now that you know how much you will pay in nanny taxes, let’s look at ways to reduce your nanny tax obligation.
Dependent Care FSA
If your employer offers a Dependent Care FSA (Flexible Spending Account), your nanny’s wages are a qualified expense. In 2022, you can set aside up to $5,000 in pre-tax dollars for your account. This reduces your overall taxable income. Depending on your tax bracket, you can likely save up to $2,300 in taxes. For the 2021 tax year, thanks to the American Rescue Plan, if you set aside the maximum of $10,500, you could see savings of up to $4,700.
Child and Dependent Care Tax Credit
You may also be able to use the Child and Dependent Care Tax Credit for any expenses not covered by your Dependent Care FSA. For the 2021 tax year, you can claim up to $8,000 of qualifying expenses – including wages paid to a nanny – for one child or $16,000 for two or more children. Your tax credit will depend on your adjusted gross income (AGI). Families with an AGI of $185,000 – $400,000 can take a 20 percent credit, which comes to $1,600 for one child or $3,200 for two or more children. This one-time increase in the credit came through with the American Rescue Plan.
For the 2022 tax year, the Child and Dependent Care Tax Credit returns to $3,000 for one child and $6,000 for two or more children with a flat 20 percent credit on expenses meaning a savings of either $600 or $1,200.
Pre-tax health benefits
Yes, offering health benefits to your employee, can help lower your nanny tax obligation. This can be done by offering a QSEHRA (Qualified Small Employer Health Reimbursement Account) as part of their compensation package. Employees can contribute up to $5,450 for individual coverage or $11,050 for a family. For that nanny making $30,000/year, you could offer $24,550 in wages and $5,450 in health benefits through a QSEHRA. Just make sure you are still paying an hourly rate that is above minimum wage and accounting for time and a half for overtime. By lowering your nanny’s gross wages, you reduce your FICA tax obligation by more than $400 and your employee also cuts their FICA and federal income taxes.
With a QSEHRA, employees are reimbursed for health insurance coverage purchased on the individual market or through the health care exchange and for out-of-pocket medical, dental, and vision expenses. Contributions are not taxed for the employer or the employee. Reimbursements are also not taxed as long as the employee has a health plan that meets minimum essential coverage.
How to pay your nanny taxes
If you hire a nanny or other household worker, you will need to obtain a federal employer identification number (FEIN) and an employer id from your state tax agency. Every quarter you can remit federal taxes (FICA, FUTA, and your employee’s federal income taxes if you decide to withhold those) using Form 1040-ES. Your state will likely have quarterly tax filing as well for state unemployment taxes.
If you decide not to remit your nanny taxes quarterly, you will pay that entire amount when you file your personal tax return. This may trigger an underpayment penalty if you owe too much in taxes. One way to avoid this penalty is to have an additional amount withheld from your pay to cover your nanny tax obligation.
At the end of the year, you will provide your nanny with Form W-2 by January 31 and file a copy of Form W-2 and Form W-3 with the Social Security Administration by the same date. Then, with your personal tax return, you will attach Schedule H, which reconciles how much you owe in nanny taxes.
Need help understanding nanny taxes?
GTM Payroll Services offers a complimentary, no-obligation consultation with a household employment expert to go over your nanny tax obligations. Just call (800) 929-9213 or schedule time with us at your convenience.
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