This article is part of a larger series on How to Do Payroll.
Nanny taxes are a combination of federal and state taxes that families need to withhold when hiring employees that work within their household. These employees can include, but are not limited to, nannies, gardeners, housekeepers, personal assistants, and even chefs.
These taxes are required once a household employee has been paid more than $2,400 in a year, and include Social Security and Medicare taxes (FICA), as well as federal and state income taxes and unemployment taxes. As an employer, you’re also responsible for a separate portion that comes from your own funds.
We’ll discuss the different taxes levied against household employees and how they are paid.
What’s Included in Nanny Taxes
Below are the different taxes you may be liable for and how to calculate them. Later in this article, we will cover the kinds of forms you need for completion and filing.
You are not required to withhold federal income taxes unless your employee requests it and you agree. IRS Pub. 15-T has the tax tables that tell you how much to withhold. You need to determine taxes on all taxable wages before you deduct any amounts for other withheld taxes. Withhold federal income tax from each paycheck based on the information included on your employee’s Form W-4.
Tip: Non-cash wages, such as bus tickets and supplies, may be considered taxable income. Check IRS Pub 525 for details.
You need to check with your state to determine state income tax withholding requirements.
If your employee makes less than $51,464 (or $57,414 if filing jointly), they may be eligible for earned income credit, which can reduce their taxes or get them a payment from the government. If you agree to withhold taxes, you are required to let your employee know about the EIC if the tax withholding table says you do not need to withhold any taxes. See the IRS Pub 926 for more details.
The Federal Unemployment Tax Act (FUTA) tax is 6% of your employee’s wages unless you pay state unemployment insurance (see below). You must pay this if you paid a total of over $1,000 in a quarter to all employees. So, for example, if you have three employees to whom you paid $600, $100, and $700, then you owe FUTA taxes. You pay FUTA tax on up to $7,000 per individual.
If your state requires you to pay state unemployment taxes, then you will receive a discount on your FUTA (usually 5.4%). To find out if your state requires you to pay unemployment taxes, visit the U.S. Department of Labor’s website. It’s important to note that the $1,000 requirement counts for quarters: January to March, April to June, July to September, October to December.
You don’t need to pay FUTA taxes until you owe more than $500; if you owe less than that, you can skip that quarter. However, if you anticipate paying over $500 in a year, it’s best to pay quarterly.
Nanny taxes are generally straightforward, but they do require attention to detail and deadlines. If you’d rather use a payroll service that can handle it for you, we recommend SurePayroll. It offers multiple ways to pay your employees, unlimited pay runs, and tax filing. It makes managing your nanny payroll easy, and is more affordable than many of the nanny-specific services available. Sign up today and get two months of payroll services for free.
Household Employees vs Contractors
You only pay nanny taxes on household employee payroll—not paychecks processed for contractors. Anyone who earns more than $2,400 from you in a year by working in your home may be considered a “household” employee. Some examples include maids and housekeepers, gardeners, eldercare, caretakers, drivers, and many more. 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 domestic worker is an employee. To learn more, check out the IRS rules in IRS Publication 926.
Contractors are generally people you hire independently for a particular job or for specific work that have control over what hours they work and usually supply their own materials. (Ex. Hiring someone to clean your gutters or cut your trees). If they are not operating as a business and you pay them over $2,600 in a year, then you may need to file a Form 1099 for them (instead of having to worry about nanny taxes).
Household Employees Exempt From 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.
- If you hire the person through an agency and the agency pays them. The agency handles the taxes or should. (Double-check this to avoid liability.)
- If you drop your child off at the sitter’s home for day care/child care.
- If the workers dictate when and how they work and bring their own equipment, such as the case with lawncare or landscaping workers, they are an independent contractor. If they have a set schedule, such as Fridays from 2 p.m. to 4 p.m. and use your equipment, then they may be considered employees.
It may be tempting to pay your household employees “under the table,” and 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.).
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.
If this feels too complicated to do your own payroll or you have multiple household employees, you may want to consider a payroll software or service. Many will handle the calculations for you, and some even file the taxes. Check out our top picks for nanny payroll services guide.
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. Check out our guide on payroll forms for more details.
Employment Eligibility Verification: Have the employee fill this out upon hiring and keep it for three years, whether or not the employee is still with you.
Employee’s Withholding Allowance Certificate: If your employee wants you to withhold federal income taxes for them, they need to fill out this form, preferably by their first day of work. It tells you how much money you need to withhold. Even if you don’t pay their taxes, they should give you this, as it makes filling out the W-2 easier.
Wage and Tax Statement: Even if you are not withholding income taxes, you need to fill out this form to give to your employee so they know how much Social Security, Medicare, and FUTA taxes have been paid as well as their gross cash wages. This enables them to fill out their tax forms accurately.
- By Feb. 1: Give your employee copies B, C, and 2 of the Form W-2.
- By Feb. 1: Send W-2 to the Social Security Administration (SSA). However, if you did not withhold federal income taxes and the Social Security/Medicare wages were below $2,400, you do not need to send this to the SSA.
Transmittal of Wage and Tax Statements: If you file form W-2s with the SSA, then you need to attach a Form W-3. This summarizes the W-2 forms you distributed for the year. Do this even if you only have one employee you are sending a W-2 for. Due by Feb. 1.
(Form 1040 or 1040-SR), Household Employment Taxes: File this with your federal income tax return or by itself if you do not have to file a tax return. Due by April 15.
Federal Unemployment Tax Reporting: If you paid FUTA in 2021, you need to submit this form, which summarizes the total FUTA taxes for which you’re liable, minus any payments you made during the year.
Send this form by Jan. 31, unless you have paid FUTA each quarter and are up-to-date. In that case, this form is due by Feb. 10.
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 for those who want a full-service provider they can afford. Check it out today.