It’s tax season and one of the most common questions household employers ask is “why does my nanny need a W-2?”
The short answer is that nannies are considered employees and not independent contractors under the Fair Labor Standards Act. That means household employees should have FICA taxes (Social Security and Medicare) withheld from their pay and receive Form W-2 no later than January 31 following the end of the previous tax year (December 31).
Form W-2 shows how much an employee earned in wages and other compensation, as well as, taxes withheld for the year.
Families also need to remit their share of FICA taxes and pay federal and state unemployment taxes. They’ll also file copy A of the W-2 and Form W-3 with the Social Security Administration by January 31 and Schedule H with their personal tax return.
Form W-3 shows the total earnings and withholdings for all of your employees in the previous year. Even if you had just one employee, you’ll still need to file this form.
Misclassifying your nanny as an independent contractor is considered tax evasion. By providing your nanny with a 1099 as an independent contractor, you’re avoiding your tax obligation and shifting the employee and employer tax responsibility to your nanny.
If you want a clear resolution to your situation, you can file Form SS-8 and have the IRS determine your worker’s status. However, this takes time and you’ll likely still be on the hook for your tax obligation as well as any late fines and penalties if you haven’t paid your employer taxes by the tax filing deadline. In almost all cases, the IRS rules that nannies are employees. You’re probably better off just treating your nanny as an employee and save yourself time and money.
Why is my nanny an employee?
Here’s the longer answer.
The main difference between classifying a worker as an employee or an independent contractor is the issue of control. With a nanny, the family defines the work that needs to be done, dictates how the work is done, sets the nanny’s schedule, and provides the tools and equipment the nanny needs to do their job. The family is in control.
For example, a family will tell their nanny how much screen time their children should get during the day, what is ok for them to eat, when and for how long they should nap, and other parameters to how they want their children cared for. They’ll also tell the nanny what days they need them to work, when they should arrive and when their shift ends. The nanny also has access to the family’s kitchen and utensils to prepare meals, diapers, strollers, and other items that are needed in caring for children.
An independent contractor controls when they work, use their own tools to get the work done, and, while their employer may tell them a desired result of the job, the worker determines how best to achieve those results. In this case, the worker is in control.
Help! How do I take care of my taxes?
If it’s tax season and you haven’t been paying your share of taxes, you’ll need to play catch up. As the old saying goes, “better late than never.” If you missed the deadlines to file W-2s and W-3s, still submit them. You may have to pay a small fine. But that’s better than what you could face by completely ignoring your obligations. Also, provide your nanny with their copy of the W-2 as soon as possible so they can file their personal tax return.
You’ll owe 7.65 percent of your nanny’s wages. This is your contribution to their Social Security and Medicare (FICA) accounts. Your nanny will pay the same amount when they file their personal return. They’ll also owe federal income taxes and, depending on where they live, state and/or local income taxes.
You’ll also owe federal unemployment taxes (FUTA), which is six percent on the first $7,000 of your nanny’s wages, and state unemployment taxes, which vary by state.
FICA and unemployment taxes, commonly referred to as “nanny taxes” are reported on Schedule H, which you’ll file with your personal return.
Now make your life easier
Once you’re caught up on your back taxes, it’s time to plan ahead so you don’t find yourself in this situation again. Paying your entire nanny tax obligation when you file your personal return can be burdensome for you and your employee. Going forward, start withholding FICA taxes from your nanny’s wages each pay period. Then remit these withholdings and file Form 1040-ES each quarter. This will spread out your and your nanny’s tax obligation over the course of a year instead of paying it in full come tax time.
Taking income taxes from your nanny’s pay is optional for household employers. However, withholding is a good idea so that your nanny doesn’t have to pay all of it when they file their return.
GTM can help
To make your life even easier, let GTM Payroll Services manage it all. We’ll take care of paying your nanny with direct deposit, withholding the proper taxes, and remitting both employee and employer taxes on a quarterly basis. We can even do the year-end documents (W-2, W-3, and Schedule H) for you. Call (800) 929-9213 for a complimentary, no-obligation consultation and see how GTM makes nanny taxes hassle-free!
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