The Social Security Administration recently released next year’s Employment Coverage Threshold for household employees. The 2021 nanny tax threshold increases by $100 to $2,300.
If a nanny or other household employee like a housekeeper, private teacher, or in-home senior caregiver, earns $2,300 or more in cash wages in 2021, Social Security and Medicare taxes, commonly called FICA taxes or “nanny taxes” must be paid by the family and the employee. Earnings below this threshold aren’t taxable under Social Security.
For most industries, there is no employment coverage threshold, so every dollar of wages is covered by Social Security and taxable.
Household employment is one of the industries with an employment coverage threshold. This amount is set every year by the IRS. For household employees, it changes with the national average wage index.
As you can tell, it’s easy for even a temporary or seasonal worker to exceed that threshold and trigger nanny tax compliance. Summer and after school nannies, as well as temporary senior caregivers, could reach the employment coverage threshold. This year, private teachers hired to supervise or supplement virtual learning may reach the threshold even if they only work for a few months in 2020.
The nanny tax threshold does not apply to wages paid to a spouse, a child under age 21, parent, or any employee under the age of 18.
Social Security and Medicare taxes are 15.3 percent of an employee’s cash wages. The employer (family) pays 7.65 percent (Social Security at 6.2 percent and Medicare at 1.45 percent) while the same amount can be withheld from the employee’s pay or the family can pay their worker’s share and not withhold.
A family who hires household help may also owe federal and state unemployment taxes. If an employee is paid $1,000 or more in any calendar quarter, the family needs to contribute federal unemployment taxes of six percent on the first $7,000 in wages. State unemployment tax rates vary. Don’t count wages paid to a spouse, child under the age of 21, or parent.
GTM can help
Nanny taxes can be confusing. Get a free, no-obligation consultation with a household employment expert at (800) 929-9213. We’ll explain your tax, payroll, insurance, and compliance obligations under federal and state laws as well as answer any questions you have about your employment situation.
Download The Complete Guide to Household Payroll
Get our complimentary guide and learn everything you need to know about paying your employees legally and filing your taxes the right way.