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Calculating nanny taxes is an important step when hiring an in-home caregiver for your children. It’ll help you understand your total budget for childcare beyond just the wages you’ll pay your nanny.
What are nanny taxes?
When a family hires someone to work in their home like a nanny or housekeeper or joins a nanny share, they become an employer and owe employment taxes to the IRS and their state tax agency. These are called nanny taxes.
Nanny taxes include Social Security and Medicare (FICA) and federal and state unemployment.
Most families pay about 9-12% of their nanny’s wages in employment taxes. There are ways to reduce - and even eliminate - your nanny tax responsibilities through tax savings programs and credits.
Using a nanny tax calculator
The easiest way for you to estimate your nanny tax obligation is to use a nanny tax calculator.
With a nanny tax calculator, you can:
Estimate your employer tax responsibility
Determine how much to withhold from your nanny’s pay for their share of taxes
See how much you can save through a Dependent Care FSA and/or the Child and Dependent Care Tax Credit
You’ll also be able to convert a desired salary to hourly and overtime rates.
Nannies and other household employees must be paid hourly and receive at least time-and-a-half for hours worked over 40 in a workweek. They can’t be paid a flat salary to cover all the hours you need them to work. Overtime rates may not apply – or can vary by state – for live-in nannies.
Understanding gross v. net pay
When calculating taxes, you’ll always pay a percentage of your nanny’s gross wages. This is their pay before any withholdings or deductions. If your nanny works 40 hours per week at $20/hour, then their gross pay is $800/week.
Net pay is often referred to as “take-home” pay. This is what your nanny takes home after all withholdings and deductions have been made.
Calculating nanny taxes
As mentioned, nanny taxes fall into two main buckets for employers: FICA and unemployment.
FICA
A household employer is responsible to remit 7.65% of their worker’s gross wages in FICA taxes. This breaks down to 6.2% for Social Security and 1.45% for Medicare.
Simply multiply your nanny’s gross wages by 7.65% to get your FICA tax responsibility.
For example, if your nanny grosses $800/week then your FICA tax for that pay period will be $61.20.
Federal unemployment
Federal unemployment taxes – or FUTA – is 6% of your nanny’s first $7,000 in gross wages for a maximum obligation of $420.
If you live in a credit reduction state, you may have a tax rate of 0.6%, which would reduce your responsibility to $42.
State unemployment
Household employers will also owe state unemployment taxes (SUI). These rates vary by state and can be up to four percent of your nanny’s gross wages up to your state’s wage base.
For example, in Connecticut, a new household employer pays three percent on the first $15,000 of their nanny’s gross wages for a maximum of $450. Your SUI rate and the state’s wage base may vary from year to year and experienced employers sometimes pay a lower rate than new employers.
Withholding taxes for your nanny
As a household employer, you’re required to withhold your nanny’s share of FICA taxes. They owe the same percentage (7.65%) of their gross wages.
While it’s not required for a household employer to do so, you can also withhold your nanny’s income taxes based on their Form W-4. This is recommended so your employee doesn’t owe their entire income tax obligation when they file their personal tax return.
In three states (Alaska, Pennsylvania, and New Jersey), your nanny will also owe unemployment taxes, which will need to be withheld from their pay.
You may also need to withhold your employee’s contribution to any state-sponsored paid family and/or medical leave. These programs replace a portion of your nanny’s wages if they need to take time off from work for a qualified reason.
Remitting your nanny taxes
You can remit your FICA and FUTA taxes along with your nanny’s share of FICA and federal income taxes quarterly using Form 1040-ES.
It’s highly recommended to pay your nanny taxes quarterly rather than all at once at the end of the year. Since nanny taxes are calculated on Schedule H, which is filed with your personal tax return, you could face an underpayment penalty if you wind up owing too much.
Check your state’s tax agency website for instructions on how to remit your state taxes. When you obtain your state tax identification, you’ll likely be given directions on how to pay taxes. Most states require you to remit unemployment and income taxes on a quarterly basis.
Paid family and medical leave programs may have different instructions for remitting contributions.
Saving on nanny taxes
There are two main ways to reduce your nanny tax obligation.
Dependent Care FSA
If you have a Dependent Care FSA through your employer, a nanny’s wages are a qualifying expense. Contributions to a Dependent Care FSA are made pre-tax, lowering your taxable income and reducing your tax liability.
The maximum amount you can put into your Dependent Care FSA for 2022 is $5,000 for individuals or married couples filing jointly, or $2,500 for a married person filing separately. That means, for a married couple, each parent can contribute $2,500 to their own Dependent Care FSA for a total of $5,000.
Depending on your tax bracket, you can save a few thousand dollars in taxes by using a Dependent Care FSA when employing a nanny.
Child and Dependent Care Tax Credit
The wages you pay your nanny are a qualified expense for the Child and Dependent Care Tax Credit. To take advantage of this credit, attach Form 2441 with your personal tax return. For the 2022 tax year, you can claim up to $3,000 in expenses for one child and $6,000 for two or more children. You can typically take 20 percent of your expenses as a credit. That means $600 for one child or $1,2000 for two or more children.
You can’t use the same expense for both a Dependent Care FSA and the Child and Dependent Care Tax Credit. If you have $5,000 in childcare expenses and are reimbursed through a Dependent Care FSA, you would not be able to claim the Child and Dependent Care Tax Credit.
However, if you have childcare costs leftover after maxing out your Dependent Care FSA, you can claim those expenses with the tax credit. For example, if you paid a nanny $11,000 or more and have at least two kids, you can be reimbursed $5,000 through your Dependent Care FSA and then claim $6,000 with the Child and Dependent Care Tax Credit.
Reposted with permission from GTM (www.gtm.com)