If you are paying someone to do regular work in your home, whether a nanny, cook, housekeeper, gardener, or other, you may be liable for taxes. Nanny taxes can comprise up to 13.65% of your employee’s wages, not counting federal income tax withholdings and your employee’s share of the Social Security and Medicare taxes. You are also responsible for a separate portion that comes from your own funds as an employer. We’ll discuss the different taxes levied against household employees and how they are paid.
Nanny taxes are generally straightforward, but they do require attention to detail and deadlines. If you’d rather get a payroll service to handle it for you, we recommend Paychex. It offers online and mobile processing, direct deposit of pay, and tax filing. You also get a single point of contact, and it’s more affordable than the nanny-specific services. Sign up for a free demo today.
Who Pays Nanny Taxes?
Anyone who earns more than $2,200 from you in a year by working in your home may be considered a “household” employee. Some examples include:
- Babysitters, nannies, eldercare
- Maids and housekeepers
- Caretakers, private nurses, health aids
Some examples of employees are:
- Nina is an au pair for your children. She lives with you and cares for the kids while you and your spouse are at work. You pay her a monthly salary.
- You hire Greg, a home healthcare specialist to spend four to six hours a day, five days a week, at your elderly father’s house. Greg does light housekeeping, cooks lunch, and occasionally takes your father shopping or out on errands. You provide him with the cleaning supplies and groceries and reimburse him for his gas. You pay him hourly.
- You pay Alex, a personal assistant, to come to your house 40 hours a week to run errands for you, manage your personal schedule, handle household repairs/services, events, and book your all your family’s appointments.
Nonetheless, not everyone you hire is an employee. For example, if you hire someone through a service and the service pays them, the nanny is their employee. Your landscaper may have his own business and bill you invoices. We discuss exceptions below, as well as the difference between employees and contractors.
Tip: If you are using an agency, be sure the agency is paying the taxes. If not, and the employee complains, you may find yourself liable as a co-employer.
Nanny Taxes, Independent Contractors, and Household Employees
You only pay nanny taxes on household employee payroll, not paychecks processed for contractors.
Contractors are generally people you hire independently for a particular job or for specific work, but they have control over their hours and usually supply their own materials. For example, if you hire someone to clean your gutters or trim your trees. If they are not operating as a business and you pay them over $2,200 in a year, then you may need to file a Form 1099 for them.
If on the other hand, you determine the work schedule, what will be done, and how it will be done, then the domestic worker is an employee. “It does not matter whether you give your nanny or caregiver great latitude, but rather that you have the right to control the work,” according to HomeworkSolutions.com. It’s considered employment whether part time or full time, whether or not the person is paid hourly or salary, or whether or not they live with you or elsewhere. To learn more, check out the IRS rules in IRS Publication 926.
Household Employees Who Are 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 an employee.
Learn more about the differences between employees and contractors in our 1099 contractor vs W2 employee guide.
How Nanny Taxes Work
If you pay your household employee more than $2,200 in a year, you need to pay taxes. Below are the different taxes you may be liable for and how to calculate them. Later in this article, we give an example and cover the kinds of forms you need for completion and filing.
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.
What Is Taxable? Cash Wages vs Non-Cash Wages
“Cash wages” means anything you pay by cash, check, money order, or direct transfer. It excludes the value of food, transportation (like bus tickets or a toll pass), clothing, and the like, that you provide your employee for their job. However, if you give them money to pay for any of these, that does count as cash wages.
Cash wages are subject to Social Security and Medicare taxes. And likewise, non-cash wages still count toward income taxes.
Social Security Taxes for Household Employees
You need to pay Social Security taxes if you paid more than $2,200 to your employee in a year, and will pay on the first $137,700 you paid that employee. The rate is 6.2% of cash wages. Your employee is responsible for the same amount as well.
Medicare Taxes for Household Employees
Like with Social Security, you need to pay Medicare taxes if you paid the employee more than $2,200 in the year, and will pay taxes on the first $137,700 you paid that employee. The rate is 1.45% of cash wages. If you paid an employee over $200,000 in a year, you need to pay an additional 0.9% in Medicare taxes. Your employee is responsible for the same amount as well.
Employee Share of Medicare and Social Security Taxes
Both you and your employee have obligations for Social Security and Medicare. You are responsible for federal unemployment taxes (FUTA).
Some household employers pay the employee’s portion out of their own funds. If you do so, then the IRS treats it as if you paid that amount to the employee as cash wages and will consider those amounts for income tax purposes. So, for example, if you pay your employee $600 in wages, but also pay their Social Security ($37.20) and Medicare ($8.70) for them, the IRS will charge income taxes on $645.90.
The IRS expects the full 15.3% of Social Security and Medicare taxes. That’s your share and your employee’s. It’s up to you to pay it all yourself or withhold the employee’s half from his paycheck.
Income Taxes for Household Employees
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.
You need to check with your state to determine state income tax withholding requirements.
Tip: Non-cash wages, such as bus tickets and supplies, may be considered taxable income. Check IRS Pub 925 for details.
FUTA: Unemployment Taxes for Household Employees
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.
State Unemployment Tax: 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 at oui.doleta.gov/unemploy/agencies.asp.
Note: The $1,000 requirement counts for quarters: January to March, April to June, July to September, October to December.
When to Pay Nanny Taxes
You need to pay nanny taxes on any eligible employee to whom you pay over $2,200 in a year. There are two deposit schedules—monthly and semi-weekly—for depositing Social Security, Medicare, and withheld 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.
Tip: 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.
An Real-World Example of Nanny Taxes
In this example, we’re paying March taxes for our babysitter, Sally. Sally earns $300 each week but did not start work until Jan. 1. That means in Q1, she had 12 paydays. $300 x 4 = $1,200. However, we also gave her $200 this month to cover gas money for the quarter. So, her cash wages this month are $1,400. We did not give her anything that would be considered non-cash wages.
FUTA: Since it’s March, we need to consider FUTA taxes. Sally is our own employee, but she earned $3,800 in the first quarter. So we are required to pay FUTA tax. It’s less than $500, so we could put it off this quarter, but we’re going to do it now rather than have a larger bill later.
We live in a state that does not charge state unemployment taxes, so we’ll be paying 6% of her wages, or $228. (Remember that the cap on FUTA taxable wages is $7,000, so next quarter, we will be paying FUTA only on $3,200 and nothing on the last two quarters.)
If we’d lived in a state that had state unemployment taxes, we’d pay the state 5.4% ($205.20) and the federal government the remaining $22.80.
Nanny Tax Calculations
Social Security: Social Security tax is 6.2% of gross cash wages, so $86.80.
Medicare: Medicare is 1.45% of wages, so $20.30.
Federal income tax withholdings: Here’s where it gets tricky. First, we need to decide whether we are paying the above taxes from our fund or deducting them from Sally’s paycheck.
- If we deduct them, then we need to look up Sally’s taxes based on $1,400.
- If we pay them ourselves, the IRS considers it the equivalent of giving Sally that money as wages. Therefore, Sally’s cash wages are $1,400 + $86.80 + $20.30 = $1,507.10. Then, you record the Social Security and Medicare payments you made on your employee’s W-2, so the IRS knows they are paid.
Why Pay Nanny Taxes
It may be tempting to pay your household employees “under the table,” and avoid the tax issue altogether. This is a bad idea not only, because it puts you in danger of owing fines and other penalties if caught; however, it also cheats your nanny or other employees out of benefits:
- Social Security credits for when she or he is retirement age. Employees earn a credit for every $1,410 they made in 2020, up to four credits a year.
- Eligibility for Medicare benefits.
- The ability to apply for unemployment if you no longer need him or her.
- Earned Income Credit (EIC). If the employee makes less than a specified amount in a year, he may be eligible for EIC. We discuss this in detail below.
In addition, you get tax deductions on a portion of the child care costs.
What Household Employers Should Do Before Paying Nanny Taxes
Take these steps before paying nanny taxes.
- Ensure the person can legally work in the United States.
- Decide if you are going to withhold federal income tax. You are not obligated to by law, but your employee can request it. If so and you agree, there are extra forms and considerations. If not, then the employee must pay the taxes himself. The same goes for state taxes.
- Decide if you will pay the employee portion of Social Security and Medicare out of your own pocket or deduct it from your employee’s pay.
- Get an Employer Identification Number (EIN). The IRS considers you an employer, so you need to apply for an EIN to use on the tax forms. You’ll use this instead of or in addition to your Social Security number on tax forms. Get this by Feb. 1, 2021.
- Get a state tax ID. Check with your state for requirements and applications.
- Gather employee information. You’ll need the employee’s full name, address, and Social Security number. You may already have this information, or it may be found on the forms she fills out.
- Get the following payroll tax forms. I-9 and W-4, W2 and Schedule H, and Form 940. Some need to be filed immediately upon hiring; others are filed at tax time. See the section below on forms.
- Determine how often you need to deposit taxes.
When to Worry About Earned Income Credit (EIC)
If your employee makes less than $50,162 (or $55,952 if filing jointly), he or she 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.
The W-2 Form B has information about the EIC, so if you give your employee that, it fulfills the requirements. Otherwise, you may need to give them a different form. See the IRS Pub 926 for details.
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.
Form I-9, 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.
Form W-4, 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.
Form W-2, 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, 2021: Give your employee copies B, C, and 2 of the Form W-2.
- By Feb. 1, 2021: 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 $2,200 for 2020, you do not need to send this to the SSA.
Form W-3, Transmittal of Wage & 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 Feb. 1, 2021.
Schedule H (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 April 15, 2021.
Form 940, Federal Unemployment Tax Reporting: If you paid FUTA in 2020, 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, the form is due by Feb. 10.
When to Get a Payroll Service Instead
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. We looked at some of the best for paying household employees that include tax filing. Check out our top picks for nanny payroll services.
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 Paychex for those who want a full-service provider they can afford. Check it out today.