Nanny Tax Guide for Household Employers
Nanny Tax Guide
Payroll. Tax. Insurance. Compliance. It’s time-consuming and may seem overwhelming. The IRS estimates that it can take a household employer 60 hours each year to comply with all federal and state tax laws and get your nanny taxes done right.
That’s why we put together this Nanny Tax Guide to help you every step of the way.
If you’d rather have GTM Payroll Services handle all of the administrative tasks associated with household payroll and nanny taxes, we offer a free, no obligation consultation to review your specific situation.
Call (800) 929-9213 or contact us. GTM can help remove the hassles, worries, and risks of nanny taxes and give you peace of mind (plus more time in life for the things you enjoy).
When You Need to Pay Nanny Taxes
The IRS defines a household employer as someone who pays an individual $2,100 or more in a calendar year to work in their home.
If you’re considered a household employer by the IRS, then you need to pay Social Security and Medicare taxes on your employee. Your share is 7.65 percent of their wages. Your employee’s share is also 7.65 percent, which you can choose to pay yourself or withhold from their wages.
Also, if you pay a household employee $1,000 or more in any calendar quarter, you must pay federal unemployment tax (six percent of wages) on up to $7,000 in wages. You may also owe state unemployment tax (about two to five percent in most states).
You do not need to pay Social Security and Medicare taxes on wages you paid to your spouse, children under 21 years of age, parent, or any employee under the age of 18. For unemployment taxes, do not count wages paid to your spouse, children under 21 years of age or parent.
Filing to Become an Employer
Becoming a household employer comes with its fair share of paperwork. There are a number of federal forms that need to be completed before your employee starts work.
Form SS-4: Application for Employer Identification Number
Household employers must have an employer identification number (EIN). This gives you a specific tax number, like a Social Security number for employees, for dealing with the IRS and other agencies. Download Form SS-4.
Form W-4: Employee’s Withholding Allowance Certificate
If you and your employee agree to withhold federal income tax, this form documents how much income tax is to be withheld from your employee’s pay. Download Form W-4.
Form I-9: Employment Eligibility Verification
Household employers must obtain a completed I-9 for every employee hired. This is used to verify the identity and employment eligibility of your domestic workers. Keep this form on file with copies of the documentation your employee provided for employment eligibility. Download Form I-9.
Form W-10: Dependent Care Provider’s Identification and Certification
This form collects information about your household employee if you plan to claim a credit for child and/or dependent care expenses on your personal tax filing or if you receive benefits under your employer’s dependent care or flexible spending plan. Download Form W-10.
Individual states may also have requirements for household employers. Contact your state’s department of taxation or revenue to understand your responsibilities. These could include:
Unemployment Identification Number
You are required to obtain an unemployment identification number with the state where the physical work will be performed. This is needed to pay state unemployment taxes on a quarterly basis.
If you and your employee decide to withhold state income taxes, then you’ll need to complete a withholding certificate through the appropriate state agency. You’ll receive an ID number, coupon booklet, and instructions on how to submit withholding taxes.
New Hire Report
You must register any new employee with the state in a certain time frame of the hire date. The report asks for basic identification information for each new employee.
Employee Work Eligibility
Your employee must have a Social Security Number or an Individual Taxpayer Identification Number (ITIN). If they are not a U.S. citizen, they must be authorized to work in the country by the Department of Homeland Security. Never assume your employee has a Social Security Number and be sure to verify all numbers with the Social Security Administration.
Employee Nanny Tax Responsibilities
At the start of their employment, inform your nanny of their payroll tax obligations. This way there are no surprises on the first payday. Household employees are liable for four key taxes:
- Social Security (6.2 percent)
- Medicare (1.45 percent)
- Federal income tax
- State and local income taxes (if applicable)
Federal and state income taxes are not required to be withheld unless agreed upon by you and the employee. However, withholding income taxes on a regular basis will benefit your employee. This way, their income tax obligations are distributed throughout the year rather than paying a lump sum at the end of the tax year. It also helps document their employment history as well as ensure both you and your employee are compliant with the law.
Calculating Nanny Taxes
Let’s say you live in New York State and would like to pay a nanny $15/hour for 40 hours of work each week (or $600 in gross pay per week) to look after one child. In this example, your employee’s withholding status is “single” and number of allowances is “0.” There is no overtime involved.
Each pay period, your employee would owe:
Federal income tax: $59.80
Social Security: $37.20
State income tax: $20.53
Total tax responsibility: $126.23
Net pay: $473.77 ($600 gross pay – $126.23 taxes)
On top of your employee’s pay, you would owe:
Federal unemployment: $3.60
Social Security: $37.20
State unemployment: $24.60
Total tax responsibility: $74.10
Each pay period, your responsibility is $674.10 (employee pay of $600 plus your tax obligation). For the calendar year, your tax responsibility is $2,875.70. This can be reduced significantly through your employer’s Flexible Spending Account (FSA) and/or the Child & Dependent Care Tax Credit.
Using a nanny tax calculator will help you determine your employee’s net pay (often referred to as “take-home pay”) as well as your total financial responsibility (employee pay plus employer taxes).
Reporting and Filing Nanny Taxes
You can pay estimated taxes on a quarterly schedule. This can help alleviate your tax burden at the end of the year. To file quarterly, you will need to submit Form 1040-ES (Estimated Tax for Individuals), which estimates employee federal income tax, employer and employee Social Security and Medicare taxes, and the employer federal unemployment tax.
Quarterly filings are due on April 15, June 15, September 15, and January 15. The deadline may be later if the date falls on a Sunday or holiday.
Another option, if not paying quarterly, is to have additional federal income tax withheld from your own salary. This may help avoid owing a large amount on your personal federal tax return.
Even if filing quarterly, you must report all federal taxes by submitting Schedule H (Household Employment Taxes) with your personal tax return. Schedule H is an annual reconciliation form that is used to report wages paid to your employee throughout the year.
You must also provide your employees with Form W-2 (Wage and Tax Statement) on or before January 31. This provides a breakdown of all withholding and income throughout the previous calendar year and helps your employee submit their individual income tax returns.
By January 31, you must also file your (employer’s) copy of an employee’s W-2 and Form W-3 (Transmittal of Wage and Tax Statements) to the Social Security Administration. The W-3 is a reconciliation of all W-2s for each employee, even if you have only one domestic worker.
Most states require a quarterly filing of state taxes. However, state tax quarters do not align with federal tax quarters. States require taxes to be submitted every three months, typically one month after the quarter ends. After you are registered as an employer with your state, you’ll receive blank quarterly forms with instructions on how and when to file. Many states now require you to remit your taxes electronically and may penalize you if you pay by check.
Reducing Your Nanny Tax Burden
Dependent Care Assistance Program/Flexible Spending Account
You can reimburse your dependent care expenses (such as your employer taxes or a portion of your nanny’s pay) with pre-tax funds through your employer-sponsored Dependent Care Assistance Program (DCAP) or Flexible Spending Account (FSA).
If your employer offers a plan, you are allowed to set aside up to $5,000 per year of tax-free money. This helps reduce your taxable income and, depending on your marginal tax rate, can save you up to $2,300 per year. Check with your company’s human resources department to see if there is a program available to you.
Child and Dependent Care Tax Credit
You can take advantage of the Child and Dependent Care Tax Credit (Form 2441) – regardless of your income level – on your personal income tax return. You can claim up to $3,000 of qualifying child care expenses (such as your nanny’s pay) paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals. The 20 percent credit on these expenses can save you $600 for families with one child or $1,200 if you have two or more children.
Beyond Nanny Taxes: Other Employer Responsibilities
You have other responsibilities beyond payroll and tax obligations.
- Many states require household employers to carry a workers’ compensation insurance policy.
- Several states have tax, wage, and labor laws that specifically pertain to household employees called a Domestic Workers’ Bill of Rights.
- Nannies must be paid at least the federal minimum wage or your state or local minimum wage, whichever is highest.
- Hours worked over 40 in a week need to be paid at no less than time and a half.
- Some states require you to withhold additional taxes for disability insurance.
Is Your Nanny an Employee or Independent Contractor?
It’s a big mistake to misclassify your employee as an independent contractor. Why is this an important distinction? With an employee, the employer pays taxes as well as the worker. An independent contractor pays both the employee and employer portions of the tax responsibility.
Misclassification is considered tax evasion and the Department of Labor and IRS have increased their enforcement. Families who are hiring a nanny, senior caregiver or someone else who will be working in their home should know the differences. Generally, if you define the work that needs to be done and control how it is done, you are an employer and the person filling this job is your employee.
We have found that nearly all of the time the IRS classifies a nanny as an employee. They should have taxes properly withheld and receive Form W-2 at the end of the year.
Nanny Tax Benefits for Your Family
Attract Higher Quality Employees
When you hire a nanny or other household employee, you’re bringing a professional on board. By nanny taxes the right way and providing your employee protections and benefits of legal pay, you’ll pick from a larger pool of qualified candidates and have a better chance of finding the right fit for your family.
Work with a Happier Employee
By treating your nanny like a professional, they will have higher job satisfaction. This leads to a happier family (especially the kids!) and an easier work relationship with your employee.
Avoid State and Federal Fines and Penalties
It’s easy to get caught paying under the table. All it takes is your employee filing for unemployment, getting injured on the job triggering a workers’ comp claim or letting the IRS know they didn’t get a W-2.
Reduce the Risk of an Audit
Once the federal government realizes you haven’t been compliant with nanny tax and household employment law, your chances of being audited skyrocket.
Take Advantage of Tax Savings
Your employer’s flexible-spending plan or the federal Child and Dependent Care Tax Credit can cover some of the qualified expenses associated with being a household employer.
Enjoy Peace of Mind
All of these benefits lead to one major advantage … peace of mind. You’ll have a solid relationship with your employee and financial protection. You won’t have to concern yourself with fines, penalties, audits or lawsuits.
Nanny Tax Benefits for Your Employee
If your employee applies for a car loan, student loan, mortgage or even a credit card, they’ll need to show that they can pay monthly installments. If your employee’s pay is not documented, they have no way to show that they have income.
Legal Employment History
Getting paid “on the books” creates a work history. This is also important when your employee applies for a loan, credit or their next job.
Let’s say your nanny has worked for you for a few years. Your children are now school age and no longer need a full-time nanny. Unemployment benefits will partially replace your employee’s lost wages for a period of time while they look for a new job.
Social Security and Medicare Benefits
Money paid by you and your employee into Social Security and Medicare is set aside to help pay for living and medical expenses when your employee retires.
Workers’ Compensation Benefits
With a worker’s compensation policy in place, your employee will receive assistance with medical expenses and lost wages if they are injured or become ill on the job. Workers’ compensation is required for household employers in many states.
Let GTM Handle Your Nanny Taxes
You have better ways to use your time than spending it on the administrative tasks of household tax and payroll. Let us manage your nanny taxes and household payroll with a full range of services including:
Automatic payroll processing with free direct deposit
Set your employee’s hours and pay rate once. Make changes only when needed. Direct deposit makes payday even easier.
100% guaranteed on time, every time tax filings
If you receive a notice from the IRS, or any other tax agency, based on a filing that GTM Payroll Services made, we’ll work with the agency on your behalf to resolve the issue. If we’re at fault, we’ll pay all the associated penalties and fines.
Ease of Use for You and Your Employee
Easily make any changes online at your convenience. Download forms, track PTO, export data to Quicken, and much more…all from the convenience of your computer or mobile device. Your employee also has online access to their tax forms and pay stubs.
Workers’ compensation insurance policies
GTM is the only payroll service to offer workers’ compensation policies in-house. We’ll handle all of your invoices, audits, and claims.
Online, secure access to your data
Access your account online or with a mobile device and have peace of mind knowing that we employ audited controls and security measures, including two-factor authentication, to prevent identity theft and misuse of data.
Compliance with tax and labor laws
Our team of household employment experts stays up to date on all changes to laws pertaining to nanny taxes and household employment and will help ensure your compliance.
Additional insurance options
We also provide health, dental, and vision insurance as well as a 401k plan. These types of benefits are affordable and can help you attract and retain top talent.
Concierge level support
Enjoy unlimited guidance and advice from our team of household employment experts, certified payroll professionals, licensed insurance brokers, and CPAs. We think they’re the best in the business and you will too. They’re just a call, email or web chat away.
Get a free, no-obligation consultation with a household employment expert. We’ll review your hiring situation and provide advice on the best way to manage your payroll, tax and insurance obligations.
Call (800) 929-9213 today!