If you hire household workers, such as nannies, babysitters, housekeepers, cooks, gardeners, health care workers, and other staff, it’s critical that you understand your tax responsibilities, sometimes known as “nanny taxes.” Here’s a quick review.
What employees are covered?
Working at home does not automatically qualify a person as a household employee. Independent contractors, such as occasional babysitters who work for a variety of families, are not required to withhold or pay taxes.
Which nanny taxes do you have to pay?
Your nanny tax obligations are different depending on the type of tax:
Taxation on earnings. Unless the employee requests it and you agree, you are not required to withhold federal income taxes (or, in most cases, state income taxes) from a home employee’s compensation. You’ll need to have the employee fill out Form W-4 and withhold income taxes on both cash and noncash wages in that case (other than certain meals and lodging).
FICA taxes. If your household employee’s cash wages are above a certain threshold ($2,600 in 2023), you must withhold and pay FICA taxes (Social Security and Medicare). You must pay the employer’s portion of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the employee’s cash compensation if you meet the threshold (but not on meals, lodging or other noncash wages). Furthermore, you must withhold the employee’s portion of these taxes (6.2 percent and 1.45 percent, respectively), however you may choose to pay the employee’s share rather than withhold it.
Note: If working for you isn’t their primary occupation, you won’t have to pay FICA taxes on wages you pay to certain family members or household employees under the age of 18. One example might be a student who babysits on the side.
Unemployment taxes. If you pay total cash earnings to home employees (other than certain family members) of $1,000 or more in any quarter of the current or previous calendar year, you must pay federal unemployment tax (FUTA). The tax is imposed at a rate of 6% on the first $7,000 of an employee’s cash wages, but credits reduce the rate to 0.6% in most situations.
How to report and pay nanny tax
Household employees, unlike corporations, are not required to file quarterly employment tax filings. Household employment taxes are instead reported on Schedule H of your personal income tax return. If you own a business as a sole proprietor, you can include household employees on Forms 940 and 941 by adding the taxes for household employees to the deposits or payments you make for your business employees.
Even if you file Schedule H for household employment taxes, you’re still responsible for paying the tax throughout the year, either through quarterly estimated tax payments or by increasing withholdings from your salary. If you don’t, you’ll have to pay the tax when you file your return and be subject to penalties for underpaying estimated tax.
If you’re obligated to withhold FICA taxes or agree to withhold income taxes for a household employee, you’ll also need to complete Form W-2.
Know your employer responsibilities
In addition to the tax obligations mentioned above, there may be other responsibilities that come with being an employer. Complying with minimum wage and overtime rules as well as establishing immigration status are examples. For further information, contact one of our CPAs.
© 2021. Updated January 2024.