For families hiring a nanny or other employee to work in their home for the first time, the idea of nanny taxes may seem confusing or complex. Even experienced household employers could use a refresher. So we’ll answer the question “what are nanny taxes” to help you understand your basic responsibilities as a household employer. Compliance with all tax, wage, and labor laws goes well beyond paying taxes but this will help keep you in the good graces of the IRS and your state tax agency.
Nanny Taxes 101
The term nanny taxes applies to the tax obligations of both the family who hires someone to work in their home and their employee. It’s not just for nannies!
The IRS defines a household employer as someone who pays an individual who works in their home $2,100 or more in a calendar year. Household employees can include nannies, in-home senior caregivers, drivers, butlers, chefs, and others. Don’t be tempted to classify your employee as an independent contractor to avoid your tax responsibility.
You need to withhold and pay Social Security and Medicare taxes. These are commonly referred to as FICA taxes in reference to the Federal Insurance Contributions Act, which mandates payroll taxes to fund Social Security and Medicare accounts.
This contribution is 15.3% of your employee’s cash wages. Your share is 7.65% broken down as 6.2% to Social Security and 1.45% to Medicare. Your employee owes the same amount. You can either withhold this from their wages or pay it yourself. Either way, these taxes should be remitted on a quarterly basis
Do not count wages you pay to your spouse, a child under the age of 21, parent, or any employee under the age of 18 at any time during the calendar year.
If you pay your household employee $1,000 or more in any calendar quarter, you’ll also owe federal unemployment taxes (FUTA). This tax is 6% of your employee’s pay on the first $7,000 of wages. Any wages earned above this amount is not taxed for federal unemployment. Again, FUTA can be paid quarterly. This is an employer-only tax.
Do not count wages paid to a spouse, a child under the age of 21, or a parent.
You’ll likely also owe state unemployment taxes (SUI). Similar to FUTA, you’ll owe a percentage (typically between 2-5%) up to a certain amount (called the taxable wage base) of your employee’s wages. State unemployment tax rates and taxable wage bases vary by state and can change year-to-year. Often times, there are different rates for new employers and experienced employers. The number of unemployment claims made by your former workers may also influence your tax rate. Your state’s unemployment office will likely send you a letter each year with your updated SUI tax rate.
State unemployment taxes are paid by the employer.
Household employers are not required to withhold income taxes from their workers’ pay. It is one of the few industries where this is allowed. However, it’s a good idea to withhold income taxes on a regular basis so your employee is not stuck paying their entire tax obligation at the end of the year. if you decide to withhold income taxes, your employee should complete Form W-4.
There are a couple of ways to save some money as a household employer.
Dependent Care Flexible Spending Account
You can contribute pre-tax funds to an employer-sponsored dependent care flexible spending account (FSA). Your employer will withhold a specified amount from your paycheck each pay period and deposit these funds into your account. You will then submit expenses for reimbursement. This can include your nanny’s wages. Since the money is set aside before taxes, your income subject to taxes is reduced.
The IRS limits the amount of money you can contribute to an FSA to $5,000 a year for married couples filing jointly, unmarried couples, and single individuals. If you are married and filing separately, you’re capped at $2,500 in contributions.
You must be able to claim the child as a dependent and, if married, both you and your spouse must work and earn income. If you’re divorced, only the parent with custody of the child can use FSA funds.
You may also be able a dependent care FSA for expenses incurred with the care of an elderly loved one provided they are unable to care for themselves and you claim them as a dependent.
Child and Dependent Care Credit
You can claim up to $3,000 of qualifying child care expenses (like your nanny’s pay) for one child and up to $6,000 for two or more children. You can receive a 20% tax credit on these expenses, which can save your family $600 (for one child) or $1,200 (for two or more children).
Similar to the dependent care FSA, you can only claim the child and dependent care credit if you and your spouse both work and need childcare services to maintain your jobs. You must file as single, head of household or married filing jointly. Your child must be under the age of 13 and care may not be provided by you or your spouse. For divorced or separated parents, the custodial parent can claim the credit even if the other parent can claim the child as a dependent.
You may also be able to claim this credit against the expenses incurred caring for an elderly loved one as long as you are the main caretaker of the individual.
Learn more about the Child and Dependent Care Credit.
Beyond Nanny Taxes
These are just the basics for understanding your obligations as a household employer. There is plenty more including domestic workers’ bills of rights, overtime pay, companionship care, paid leave laws, and workers’ compensation.
GTM Can Help
If you’d rather not deal with nanny taxes, payroll, and staying up-to-date with tax, wage, and labor laws, leave it to GTM Payroll Services. We’ll manage it all for you including paying your employee with direct deposit, remitting employer and employee taxes to the proper agencies, obtaining workers’ compensation coverage, and helping you stay compliant with the law. Call us at (800) 929-9213 for a complimentary, no-obligation consultation.
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