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When you hire someone to work in your home – like a nanny, housekeeper, or senior caregiver – or join a nanny share, you become an employer. And with that designation comes employment tax responsibilities, which are commonly called “nanny taxes.”
You’ll want to get this part of household employment right as mistakes – even unintentional ones – can be costly. Paying "off the books" and skipping your nanny tax obligations completely is even worse.
So how do you pay nanny taxes and make sure everything is correct? There are a few ways to do it including paying nanny taxes yourself.
What are nanny taxes?
Nanny taxes include Social Security and Medicare (FICA) and federal and state unemployment.
In some states, the family and/or employee may need to contribute to a paid leave program.
And while not considered a tax, workers’ compensation coverage and/or disability insurance may also be a household employer requirements in your state.
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.
Paying nanny taxes using a payroll service
Signing up with a nanny payroll service is the easiest way to take care of paying your nanny and remitting your employment taxes. Not every payroll service is the same so you’ll want to find one that is the best fit for your needs. Essentially, you’ll input your nanny’s wages and the service will calculate how much to pay your employee and what to withhold in taxes. More comprehensive services will take care of sending a check to your nanny or paying them by direct deposit and hold on to your employer as well as employee taxes to remit them to the IRS and state tax agency on a quarterly basis.
Paying nanny taxes using an accountant
Some families rely on their accountants to handle their nanny taxes. If your accountant knows the ins and outs of household employment, then this could be a good way to go. Often times, however, accountants may not be familiar with paying nanny taxes because they don’t have many clients with household employees. Or they don’t know the nuances of household employment – especially on the labor side – that can land a family in trouble. Accountants may not want to deal with nanny taxes and focus their time on more profitable work. In fact, many firms refer their clients to, or partner with, a nanny payroll firm to provide this service.
Paying nanny taxes yourself
With a little bit of time and effort, you can pay nanny taxes yourself. The IRS estimates that it will take a family about 60 hours a year to manage nanny payroll and taxes on their own. That may only take into account taxes and wages and not household employment labor laws such as domestic worker protections.
If you’re ready to take this on, here are 7 steps to paying nanny taxes yourself.
1. Obtain employer tax ids
Since you’re now an employer, you need your tax ids.
You can apply online for your Federal Employer Identification Number (EIN) on the IRS website. It only takes a few minutes.
For your state id, visit your state’s tax agency website for information on how to apply.
2. File a new hire report
All employers – including families with household help – must file a new hire report with their state. You’ll need to provide basic information about your employee including name, address, Social Security number, and hire date. And your name, address, and EIN from the IRS. You may be able to complete a new hire report online with your state’s tax agency.
Federal law requires employers to file a new hire report within 20 days of hire although some states require it sooner. The information is maintained in the National Directory of New Hires, which child support agencies use to locate a parent who owes child support and issue an income withholding order. It’s also used to help prevent workers’ compensation and unemployment fraud as well as reduce the cases of public assistance going to the wrong people.
3. Calculate employee withholdings and employer taxes
Now that you’re set up as an employer and your worker is on the job, the next step is to pay them properly and withhold the right amount of taxes.
You can do this with the help of 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
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.
As a household employer, you’re also required to withhold your nanny’s share of FICA taxes from their pay. They owe the same percentage (7.65%) of their gross wages.
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.
Your state will inform you of your SUI rate on an annual basis.
Income tax
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.
Other withholdings
In some states, you may be required to withhold for disability insurance and/or paid leave programs. In three states (Alaska, Pennsylvania, and New Jersey), your nanny will also owe unemployment taxes, which will need to be withheld from their pay. Check your state’s nanny tax guide for additional information.
4. Prepare and distribute pay stubs
On payday, you’ll provide your nanny with their net wages for the pay period. 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. You’ll also give them their pay stub, which will detail the hours they worked at their regular and overtime rates as well as how much was deducted from their pay for each required withholding (i.e. FICA, income taxes, paid leave programs, disability insurance, etc.).
Some states and cities with domestic worker bills of rights may dictate that your employee is paid weekly and receive additional details on their pay stub such as their paid-time-off balances.
5. File and remit quarterly employment taxes
When you receive your state tax id, the tax agency will likely provide a method and schedule for you to remit your unemployment taxes as well as any employee income taxes (if applicable). Most likely, taxes will need to be remitted on a quarterly basis.
For your federal taxes (FICA, unemployment, and employee income), use Form 1040-ESto remit those on a quarterly basis.
The typical schedule is:
Payment periodDue dateJan 1 – Mar 31Apr 15Apr 1 – May 31Jun 15Jun 1- Aug 31Sep 15Sep 1 – Dec 31Jan 15 of the following year
Due days may vary depending on if they fall on a holiday or weekend.
Your alternative to quarterly tax filings is to have more taxes withheld from your own pay to cover your nanny taxes when you file your personal tax return.
You should do one or the other. If your nanny tax obligation is large enough, you may wind up owing taxes when you file and possibly be subjected to an estimated tax penalty and interest for underpaying taxes during the year.
6. Prepare and distribute Forms W-2 and Form W-3
By January 31, you should provide your employee with their Form W-2.
Also, file Form W-3 and a copy of your employee’s Form W-2 with the Social Security Administration by January 31.
7. Complete Schedule H and file with your federal tax return
Schedule H is where you report household employment taxes to the IRS and is filed with your personal tax return.
Monitor nanny tax and household employment labor laws
Those seven steps will take you through the basics of managing nanny taxes on your own. However, tax, wage, and labor laws are frequently changing and it’s important for household employers to monitor updates to make sure they maintain compliance. Minimum wage rates increase. Domestic worker protections are added. Paid leave programs are introduced.
Reposted with permission from GTM Household (www.gtm.com/household)
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