Nanny Tax

A combination of payroll taxes that are withheld from a household employee

What is the Nanny Tax?

The nanny tax is a combination of payroll taxes that are withheld from a household employee. More specifically, anyone who pays a household employee more than $2,200 per year will be legally required to withhold and pay the Federal Insurance Contributions Act (FICA) Tax. The tax includes Social Security and Medicare.

Nanny Tax

It is important to note that although the tax is called a nanny tax, it also applies to other household employees, such as gardeners, housekeepers, or personal chefs, who are otherwise known as domestic workers.

In addition, the Federal Unemployment Tax Act (FUTA) is a legislation that requires employers to pay 6% of their household employees’ first $7,000 in wages if they are paid more than $1,000 per year. However, the amount varies depending on location.

Requirements of the Nanny Tax

  • The household employer needs to create tax accounts with the Internal Revenue Service (IRS) so that they can acquire an Employer Identification Number (EIN) and fill out a Form I-9. It will help verify that their employee is, in fact, a household employee.
  • The household employer must withhold FICA taxes from their employee and potentially any other state-specific taxes. This includes 7.65% of the employee’s wages, and an additional 7.65% must be paid by the employer. Since the same amount is owed by both employee and employer, it is easy for the employer to calculate.
  • For unemployment taxes, employers also need to pay 6% of the first $7,000 of their employee’s annual wages.
  • The household employer will be required to submit unemployment insurance and state income tax returns and remit the required amount.
  • The household employer must supply Form W-2 to their employee.
  • The household employer must fill out Form 1040, which includes a summary of the FICA and other related taxes that have been withheld from the household employee.
  • It is important that the type of household employees mentioned above are correctly classified as household employees and not as independent contractors in order to avoid the payment of taxes.

It is imperative overall that household employers comply with the regulations and that they don’t pay their nannies in a dishonest way. If the employers are found to not be following the regulations, then interest and penalties may be imposed. Additionally, the employer can look for an opportunity for tax breaks related to the nanny tax.

Tax Exemptions

The FICA taxes allows a few exemptions, including:

  • A spouse
  • Another child of the employer who is under the age of 21
  • The employee is under the age of 18
  • The employer’s parents, unless the parent cares for that child and the employer is under the age of 18 or the employer is widowed or, for example, with a mental condition that would require the parent to care for the child for more than four continuous weeks

Importance of the Nanny Tax

The nanny tax is important to comply with for both the household employee and the employer. Firstly, it is in the best interest of the household employee. If they are employed properly and legally, it can help with unemployment benefits or workers’ compensation should they require it, and it gives them verifiable income. For the employer, it is important to comply with the tax because it will help them avoid any legal troubles, and it can also be utilized as a tax break.

Practical Example

Consider an individual who employs a nanny to take care of the former’s children during the workweek. They work from 9:00 a.m. to 5:00 p.m., Monday to Friday, with an annual salary of $40,000. Since they do not fall under any of the exemption categories, the individual is required to follow the regulations of the nanny tax.

Firstly, to calculate the tax, multiply $40,000 by 7.65%. Therefore, the FICA tax will be $3,060 from their wages, and the employer must add an additional $3,060. Additionally, the employer will be required to pay the FUTA tax of $420 (6% of the first $7,000) for the employee. The next step for the employer is to ensure all proper forms are filled out.

More Resources

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