The ‘nanny tax’ is a collection of taxes you are required by law to pay if you meet the criteria. See below to learn who each of these items apply to, and why you and your nanny should care.
Social Security and Medicare (aka FICA)
Required if you pay your nanny cash wages of $2,200 or more in 2020 (up from $2,100 in 2019). Some exceptions apply if your nanny is your spouse, your child under the age of 21, your parent, or under the age of 18; in those cases, see the Federal Household Employer Guide.
Federal Unemployment Tax (FUTA)
Required if you pay cash wages of $1,000 or more in any calendar quarter of 2020 or 2019 to your nanny. Exceptions are if your nanny is your spouse, your child under the age of 21, or your parent. Unlike Social Security and Medicare, FUTA is entirely employer paid and is not withheld from your nanny’s paycheck.
(State Dependent) State Unemployment Tax (SUTA)
Some states also impose a state unemployment insurance tax which can be in addition to FUTA or instead of it. This is state dependent and the rate can vary by individual, depending on your household employment history.
(State Dependent) Worker’s Compensation Insurance
Some states require household employers to carry Workers’ Compensation Insurance. Even if it is not required in your state, it is still recommended to protect yourself in case your nanny injures herself while on the job. This needs to be obtained from an insurance agency. Talk to one in your area for details around local requirements, cost, and how to purchase. Your homeowner’s insurance policy may provide coverage in some scenarios, so this may be a good place to start.
(Optional) Withholding Federal and State Income Tax
Withholding federal and/or state income tax is not required of household employers. But if your employee asks you to withhold it, you can.
Due to the additional overhead on the employer to handle this case, some nanny employers choose to instead advise their nanny to estimate their tax burden for the year using a tax estimator to plan accordingly.
For federal income taxes, this can be done via the IRS Withholding Calculator or IRS Publication 505. If your nanny expects to make enough to owe income tax, she can pay estimated taxes on a Quarterly basis via IRS Form 1040ES.
Benefits of going through all this overhead
You may be wondering why not just pay under the table? Besides being illegal, there are benefits to both employer and employee to paying legally. For the Employer, you can take advantage of tax-deferred Dependent Day Care plans offered by your employer or you may be eligible for the Child and Dependent Care Tax Credit, as well as not having to fear an IRS audit and worry about legal repercussions. For your nanny, she will be accruing Social Security, be eligible to collect unemployment, and have record of job history to build up credit.
See the complete Federal Household Employers Guide at https://www.irs.gov/publications/p926/ar02.html
Download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.