Nanny taxes are federal and state obligations from employing household workers like nannies, housekeepers, or personal assistants. Employers must withhold taxes once an employee’s annual pay is or exceeds $2,700. These taxes cover Social Security, Medicare, federal and state income taxes, and unemployment taxes.
Employers have their own financial contributions separate from employee withholdings. This guide simplifies the process of understanding and paying these taxes.
Key Takeaways:
- The taxable income threshold can change from year to year. In 2023, the threshold was $2,600.The amount increased to $2,700 in 2024.
- Nannies are generally entitled to overtime pay and, depending on your state of residence, they may also be entitled to sick leave and rest days.
- Household employers are not required to withhold federal income taxes. However, if your nanny requests it and you agree, you must withhold and remit federal income taxes.
- You may be eligible for tax credits of up to $3,000 for one qualifying individual or up to $6,000 for two or more qualifying persons.
While managing nanny taxes demands careful adherence to details and deadlines, services like SurePayroll by Paychex facilitate this process, offering efficient payroll management and tax filing solutions at competitive rates. Explore SurePayroll for hassle-free nanny tax compliance.
Nanny Tax Categories: What It Includes
When hiring a nanny, you’re engaging in an employer-employee relationship that subjects you to tax obligations. Below are the different taxes you may be liable for and how to calculate them as a household employer. Later in this article, we will cover the kinds of forms you need for completion and filing. You may visit the IRS’s Household Employer’s Tax Guide for additional information.
Who Are Considered as Household Employees
If you hire someone to work in and around your home, that person is a household employee. Some examples include maids, housekeepers, personal assistants, gardeners, nannies, private nurses, caretakers, and drivers.
The general rule of thumb is that if you determine the work schedule, what will be done, and how it will be done, then the worker is an employee. To learn more, check out the IRS rules in IRS Publication 926.
Meanwhile, workers who offer services to the general public are not considered employees. Contractors would fall under this category. They are generally people you hire independently for a particular job or for specific work who have control over what hours they work and usually supply their own materials. Some examples include landscapers, plumbers, and repairmen. However, if they are not operating as a business and you pay them at or over $2,700 in a year, then you may need to file a Form 1099 for them (instead of having to worry about nanny taxes).
Not every household worker is considered an employee, however. You do not need to pay nanny taxes if paying the following:
- Your children, if under 21.
- Your parents; parents have one particular exception, however. If you are a single parent and your child has a mental or physical disability that prevents self-care for at least four consecutive weeks in three months and you cannot care for your child personally for at least four consecutive weeks in three months, then your parent is considered an employee.
- Minors, unless this is their primary household income for the year.
- Workers who are hired through an agency and the agency pays them. The agency handles the taxes or should. (Double-check this to avoid liability.)
- Daycare/child care center employees or babysitters who will take care of your child in their homes (not your private home).
It may be tempting to pay your household employees “under the table” to avoid the tax issues and having to determine employee vs contractor all together. However, this is a bad idea as it puts you in danger of owing fines and being out of compliance if caught. It also cheats your employees of benefits they’re entitled to (Medicare benefits, unemployment, etc.).
How to Pay Nanny Taxes
To ensure you’re paying nanny taxes correctly, follow these steps.
Step 1: Understand your nanny is a household employee. In almost all cases, the IRS considers nannies as household employees, not independent contractors. This remains true regardless of hours worked, wages paid, or the details of an employment contract. Give your nanny a W-2 form for their tax filing and not a 1099 form. Misclassifying workers is seen as tax evasion and should be avoided. To learn more, read our comparison of W-2 vs 1099 workers.
Step 2: Acquire federal and state employer tax identification numbers. To file returns with the IRS and state, secure a Federal Employer Identification Number (FEIN) and state tax identification number for unemployment insurance and possibly state income taxes. These IDs identify you as a household employer. Apply for them as soon as your nanny accepts your job offer.
Step 3: Report a new hire to the state. All employers must file a new hire report with their state immediately after hiring a new employee. Find your state agency responsible for this filing, which you can most likely file online.
Step 4: Withhold federal and possibly state income taxes. While you’re not required to withhold income taxes from a household employee’s pay, it’s good practice to do so. This helps your nanny plan for their own tax obligations and avoids potential underpayment penalties. The amount of income tax to withhold is determined by how your nanny completes their W-4 and state withholding form, if your state collects income taxes.
Step 5: Deduct Social Security and Medicare taxes. Known as FICA, these collective taxes must be deducted from your nanny’s wages. Use a paycheck calculator to determine the correct amount.
Step 6: Pay state taxes and file state household employment tax returns. As a household employer, you’re required to file state unemployment tax returns and pay unemployment insurance taxes. If your state has income taxes, you’ll also need to file state income tax returns and remit the withheld income taxes from your nanny. Some states require monthly deposits.
Step 7: Make estimated tax payments to the IRS quarterly. To manage federal household employment taxes, the IRS recommends making estimated tax payments throughout the year. These payments should include the FICA taxes and federal income taxes withheld from your nanny, as well as your own FICA taxes and federal unemployment insurance taxes.
Step 8: Prepare year-end tax forms. At the end of the calendar year, provide your nanny with their W-2 and file Form W-2 Copy A and Form W-3 with the Social Security Administration by the end of January. These forms summarize your nanny’s wages and withheld taxes. You’ll also need to file a Schedule H with your personal income tax return by the April 15 deadline.
Nanny Tax Payroll forms
As an employer, you need to submit certain payroll forms to the IRS. Some need to be sent to your employee, and you should keep copies of all of them. Below are summaries of each form important for household employers.
When to Pay Nanny Taxes
There are two deposit schedules—monthly and semiweekly—for depositing Social Security and Medicare and withholding federal income taxes. The schedule you use depends on how much you paid and is determined by looking at the previous year. For more information, check IRS Publication 15.
You need to file FUTA taxes for each quarter you pay your employees over $1,000 in wages total. Otherwise, you may only need to pay at the end of the year.
Note: The IRS requires you to stay up-to-date on your tax deposits for employees. In most cases, you cannot simply pay it at the end of the year like you might do with income taxes. Be sure to check IRS Publication 15 for schedules. We also list deadlines in the section on forms below.
Benefits of Paying Nanny Taxes
Paying nanny taxes can be cumbersome, but doing so gives benefits to both you and your nanny. It legitimizes your employment arrangement, contributes to your nanny’s long-term financial security, and ensures compliance with federal and state laws. Here’s a quick snapshot of the benefits of paying nanny taxes for you.
- Legal Compliance: Adhering to tax laws avoids potential legal issues and penalties. It keeps you in good standing with the IRS and your state government.
- Employee Retention: Offering a legitimate payroll setup can make your job offer more attractive to high-quality candidates. It shows you value your employee’s welfare and professionalism.
- Tax Credits: You may qualify for tax credits, like the Child and Dependent Care Credit. This could reduce your overall tax liability by allowing you to claim tax credits of up to $3,000 for one qualifying individual or up to $6,000 for two or more qualifying individuals.
Penalties for Not Paying Nanny Taxes
Not paying nanny taxes can lead to serious consequences. If you don’t report your household employee’s income and pay the necessary taxes, you could face both civil and criminal penalties.
- Back taxes. The IRS can require you to pay back taxes for the time you didn’t pay nanny taxes, both for your share and your nanny’s share. This could also include federal and state unemployment insurance taxes, which should have been paid.
- Penalties and interest. On top of back taxes, the IRS can also impose penalties and interest, up to 100% of the tax you owe. Interest accrues from the date the taxes should have been paid.
- Felony charges. In severe cases, failure to pay nanny taxes could be considered tax fraud, a felony offense. If found guilty, you could face up to five years in prison and up to $250,000 in fines.
- Audit risk. If your nanny files their own taxes and reports their income and you haven’t been paying nanny taxes, it could trigger an audit by the IRS.
Unlike other types of tax infractions, there’s no statute of limitations for failing to report and pay federal payroll taxes. This means the IRS can audit you at any time and require you to pay the unpaid taxes, penalties, and interest.
Nanny Tax Frequently Asked Questions (FAQs)
You may be eligible for tax credits, like the Child and Dependent Care Credit. This federal tax credit allows for a portion of childcare expenses, including nanny payments, to be credited, lowering your income tax liability. Dependent care expenses can be paid with your pre-tax Flexible Spending Account funds, too.
Withholding federal income tax for your nanny is not mandatory—but it is advisable. If you and your nanny choose to withhold, you must report these taxes using Schedule H with your federal income tax return. Be sure to provide your nanny with a W-2 form, detailing the withheld amounts by January 31st of the following year.
The IRS generally focuses on the employer’s obligations rather than the employee’s. However, as an employer, you’re responsible for meeting the tax requirements, such as paying the correct amount of Social Security, Medicare, and if applicable, federal unemployment tax. While the IRS doesn’t typically go after babysitters, ensuring you fulfill your tax obligations prevents any issues for both you and your employee.
Yes. In 2024, if you pay a household employee $2,700 or more in the year, you are required to withhold and pay Social Security and Medicare taxes. If you pay $1,000 or more in a quarter, federal unemployment tax applies.
The provision of sick time for nannies varies significantly by state and municipality. There is no federal law mandating paid or unpaid sick leave for domestic workers, but several states and cities have enacted their own laws to ensure these workers receive paid sick leave.
Federal law mandates that nannies, like other domestic workers, are entitled to overtime pay. Specifically, any hours worked beyond 40 in a single workweek should be compensated at 1.5 times the regular hourly rate. This provision applies regardless of whether the nanny is live-in or live-out. Some states have additional rules, offering overtime for more than eight hours worked in a single day, or providing mandated rest days.
Bottom Line
Paying nanny taxes for your household employee is important, not only to stay on the right side of the law but also for future benefits for your employee. While there are a lot of things to consider at first, once you get into a routine, it’s not especially hard.
Nonetheless, there are many excellent payroll software and services that can make the job easier. We recommend SurePayroll by Paychex for those who want a full-service provider they can afford. Check it out today!
