How Do I Pay Nanny Taxes?
What is the Nanny Tax?
If you have a Nanny, you might be subject to the “Nanny Tax”. What is the Nanny Tax? Well, if your nanny watches your children in your home, and you pay them more than $2,000 a year, which you will probably hit after 4-6 weeks of having a full-time Nanny, then you have yourself what the IRS calls a Household Employee. Now if you are in the mood for some light reading, the IRS puts out Publication 926, Household Employer’s Tax Guide annually. If you are like me, the following article will bring you up to speed enough to discuss your situation with your tax professional.
Is My Nanny A Household Employee?
For the majority of families that employ a nanny on a full or part-time basis, if the work is done in your house, chances are that this person will qualify as a household employee. Even for those of us who don’t consider ourselves to have regular childcare, that $2,000 a year threshold (or $1,000 a quarter) can add up quickly when you use the same sitter. This is why it is always good to have a network of trusted people that you can use for date night.
In the rare instance that your nanny/babysitter runs their own independent business, which includes making their services available to the public, not just you, then you are off the hook. For example, if you contract your childcare through a babysitting agency that employees a staff of childcare professionals and offers those services to the general community, then that company would typically be responsible for employment taxes and paperwork. Also, it is important to note that the Household Employee does have to be doing work in your house. If your children go outside of the home to be watched, chances are you do not have a Household Employee.
Paying Taxes On A HouseHold Employee:
Once it is clear that you do have a Household Employee you will need to start planning to pay Payroll Taxes. Payroll Taxes consist of both employer and employee contributions to Social Security and Medicare, which is about 7.65%, as well as FUTA (Federal Unemployment Tax) and any other state-level payroll or income taxes that you might be subject to. Step one is usually setting up a Federal Employer Identification Number or EIN. This is usually only needed if you don’t have any other business that you or your spouse owns. Another decision you will need to make is whether or not to withhold these taxes from your employee’s paycheck. If you choose to do so, you might need to create a withholding account with your state’s tax commission. You will need to familiarize yourself with State level Household Employee rules as well. This is definitely something you want to figure out first thing when hiring a new nanny, as many states can require quarterly payments if you are withholding taxes from your nanny’s paycheck.
Conclusion:
Like I said at the beginning, this article should not be taken as tax or legal advice, but simply as the tip of the iceberg when it comes to taking care of The Nanny Tax. Once you have determined that your childcare is going to qualify as a Household Employee, you should get in touch with a tax professional that can assist you with setting up the withholding and preparing any additional paperwork. Also, be sure to research Household Employee tax laws at the state level, to determine any additional steps you need to take.
