When hiring a nanny, most parents (like myself) focus on things like how well will they take care of my kids, do they do laundry, like to cook, etc. However, you need to remember that most likely when you hire a nanny, you need to know the how and when do you pay and withhold taxes (such as Social Security, Medicare, and unemployment taxes). You also may need to issue your nanny a W-2 and submit it to the federal government. Understanding these tax rules will help you navigate through any obstacles faced with the IRS when hiring help within your home.
When is a nanny a household employee?
A nanny is almost always considered a household employee. If you hire a nanny and control what work is done and how it is done, then they are considered a household employee. You are still the employer even if you found a nanny through an agency. This is because you have control over the work and pay the person directly. It also does not matter if the nanny is full-time or part-time or how often you pay them.
This is also true for parents who “nanny share”. Since both families typically control the work and how it is done, each family would be an employer and would pay nanny taxes on the wages it had agreed to pay.
When isn’t a nanny a household employee?
In-home day care providers who offer their services to the public (perhaps for a number of different clients) would most likely be considered self-employed and not household employees. Self-employed child care providers provide their own supplies and equipment.
What employment taxes do household employers pay?
You must pay certain taxes, just like other employers. If you pay a nanny (or any household employee) more than $2,200 wages in 2020, you and your employee each pay 7.65% for Social Security and Medicare taxes. Some people may choose to pay the nanny’s share themselves instead of withholding their share from the wages. Either way, you are responsible for remitting both your share of the taxes, along with your employees.
You also need to pay federal unemployment tax on the first $7,000 of wages if the you pay the nanny $1,000 or more in any calendar quarter. The federal unemployment tax rate is 6%. You should also consider that they may be required to pay state unemployment taxes.
What about grandparents or siblings who work as a paid nanny?
Anyone under the age of 18 (unless they provide household services professionally) or if they are a sibling under the age of 21 would not be considered a household employee. Grandparents or older siblings however, would be considered household employees if they meet the other requirements.
What income tax requirements do household employers face?
You are not required to withhold income tax from your nanny’s pay, but may choose to do so. If you plan on withholding income tax, the nanny would need to complete a W-4 so that you or a payroll company can calculate the correct withholding amount.
What does a household employer do with withheld taxes?
Household employers pay the withheld taxes along with their own income taxes due by April 15. Although you do not have to pay the taxes before the due date of your return, you may want to increase your own income tax withholding or pay estimated taxes to cover the additional taxes due and avoid potential estimated tax underpayment penalties.
What are the tax benefits for parents with a nanny?
Understanding the tax benefits of hiring a nanny is very important! You may be eligible for the child care credit which can be worth between 20-35% of $3,000 in qualifying expenses for one child or $6,000 for two or more children.
You may also be eligible to use your dependent care Flexible Spending Account (FSA) to pay your child care expenses, which allows you to save up to $5,000 pre-tax to use toward expenses. Any pre-tax FSA benefits are subtracted from expenses used for the child care credit. This can be confusing and a great opportunity to hire a tax professional to ensure you are maximizing your child care tax benefits.
What nanny tax forms do household employers need and where do they submit them?
You will need to submit a few different forms. You’ll need to file Form Schedule H with your own federal income tax return which reports Social Security, Medicare, unemployment tax and any income tax withheld from your nanny’s wages.
You will also need to issue a W-2 to your nanny by the end of January and submit a copy, along with Form W-3, to the Social Security Administration by the end of January.
What about state taxes?
Each state has different requirements and processes. You can check with your state department of revenue for information or reach out to us for assistance!
Please feel free to check our source: IRS Publication 926, Household Employer’s Tax Guide and IRS Publication 503, Child and Dependent Care Expenses