Understanding Nanny Taxes and What to Pay

The IRS defines a household employer as someone who pays an individual $2,000 or more in a calendar year (update: this threshold increased to $2,100 for 2018) 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. Also, if you paid 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). Use the guide below for understanding nanny taxes and what you need to pay in order to be a compliant household employer.

Social Security

Provides financial coverage when you are retired from the workforce. The employer pays 6.2 percent of their employee’s gross salary and withholds the same percentage from their employee’s pay for a total contribution of 12.4 percent.

Medicare

Medicare provides basic medical insurance when a person is retired. As with Social Security, the employer and employee contribute the same amount. Both pay 1.45 percent of the employee’s gross salary.

Federal Income Tax

Withholding federal income tax from your employee’s paycheck is optional. However, you must withhold income taxes based on your employee’s completed W-4 form. This is an employee-only withholding. You, as the employer, do not contribute to the federal income tax. How much your employee owes in federal income tax depends on his or her income and filing status.

Federal Unemployment Tax (FUTA)

If you pay your household employee $1,000 or more during any calendar quarter, then you are responsible for paying federal unemployment taxes. This tax is paid by the employer only and is not withheld from the employee’s pay. It’s paid on the first $7,000 of gross wages at the usual tax rate of 0.8 percent. You’ll report FUTA payments on your Schedule H form, which is filed with your personal income tax return.

Note: You may be able to take a credit against your FUTA tax for amounts you paid into state unemployment funds. It could be as much as 5.4 percent of FUTA taxable wages.

State Unemployment Insurance

State unemployment insurance typically falls between two and five percent on a certain amount of each employee’s gross wages. Like FUTA, this is paid by the employer only and is not withheld from an employee’s pay.

State Income Tax

As with federal income tax, withholding state income tax is not required unless agreed upon by you and your employee. However, withholding taxes on a regular basis will help your employee distribute their owed income tax over the course of a year, rather than paying it all at once when taxes are due.

Disability Insurance

Five states (California, Hawaii, New Jersey, New York, and Rhode Island) also require you to withhold additional taxes for disability insurance. These programs are state-mandated and funded through employee payroll deductions. They provide short-term benefits to employees who are unable to work due to a non-work related illness or injury.

Local Income Taxes

A number of cities, towns, counties, and school districts across the country levy their own income taxes, which is in addition to any state income taxes.

Looking for a better way to use your time than managing these nanny tax obligations? Let GTM take care of it so you can spend more time with your family. 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.

Contact us at (800) 929-9213 today!