Household Employer Responsibilities
Rest assured that when you use GTM’s household tax and payroll service, you will be compliant with strictly-enforced tax regulations. GTM will also assume all liability for timeliness and accuracy of reporting, limiting your exposure for a possible audit.
The information below is devoted to providing answers to some of your basic questions regarding payroll, nanny taxes, and other legal obligations for household employers.* Please note: there are a few exceptions in certain states.
Critical Tips: How to Comply with Federal and State Regulations for Employing a Nanny
Steps to Take Before You Hire a Nanny
If you are going to hire a nanny, it’s important to understand your obligations as a household employer. You must file all applicable nanny tax forms, Social Security, Medicare, federal and state unemployment insurances, and income taxes. These obligations apply to all full-time and part-time nannies that you employ and expect to pay more than $2,200 in 2020 (or paid more than $2,100 in 2019).
Some families pay their child care providers in cash or “off the books.” Although this gives the employee more income and saves families from the extra paperwork, it is illegal and can make you liable for unpaid childcare taxes, interest, and penalties. This also cheats the nanny from contributing to a social security account and inhibits the nanny from establishing credit or a legitimate employment history. Once you hire your nanny, you will begin the process of filing forms and paying nanny taxes.
Get an Employer Identification Number (EIN)
In order to report childcare employment taxes and issue employee tax statements, you must obtain an employer identification number (EIN) from the IRS. Your state will require you to obtain a separate number for state unemployment insurance reporting and possibly income tax withholding reporting as well.
Pay Social Security & Medicare Taxes
Your household employees’ wages fall under the Federal Insurance Contribution Act (FICA), so a portion of the wages you pay needs to be withheld and paid as Social Security and Medicare taxes. Both you and your employee are required to pay a percentage (7.65%) of the gross wages. You may pay the entire amount yourself and list the employee’s share as additional taxable gross income. The IRS, realizing that many employers will not want a large tax liability at the end of the year, strongly recommends quarterly estimated payments.
Pay Federal & State Income Taxes
If your employee requests that you withhold federal and state income taxes from their pay and you agree, then you must withhold the proper amounts by utilizing the IRS and your states withholding guide. The IRS encourages Household Employers to deposit federal nanny taxes four times a year using the 1040 ES form, or annually with the Schedule H of the 1040 form. Generally, all states require state income taxes to be paid quarterly with your state income tax department. All wages and tax withholdings must be reported on your employees’ W-2 form at the end of the year. The W-2 form must be given to your employee, the IRS, and to your state.
Pay Federal & State Unemployment Tax
You must pay federal and state unemployment insurances as an additional cost to the employee’s gross wages. As an employer, you pay these taxes on a preset amount of each of your employees’ annual wages. The IRS and some states require you to treat non-cash benefits, like meals and lodging, as wages subject to this nanny tax.
Check State Requirements for Workers' Compensation & Disability
Some states require that you carry a workers compensation and/or disability policy if you employ someone on a full-time basis. Contact GTM Payroll Services at (800) 929-9213 ext 7213 about coverage in your state.
Use Dependent Care Assistance & Tax Credits
You can pay your household employee with pre-tax funds through a Dependent Care Assistance Plan (DCAP), a tax-exempt fund, which your employer would offer as a benefit. This plan allows you to qualify up to $ 5,000 of your annual salary federal and state income tax-free. Contact your human resources office for details. You can claim the Child and Dependent Care Tax Credit on your federal income tax return if you are not taking advantage of a DCAP.
*The information contained within 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 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 on the information found within.