30 May 2023 Are You Liable For “Nanny Taxes”?
If you employ a household employee of any kind — which may include nannies, babysitters, housekeepers, cooks, gardeners, health care workers, and other employees — it’s important to understand your tax obligations for them, commonly referred to as “nanny taxes.” Here’s a quick overview.
Which Workers Are Covered?
Simply working in your home doesn’t necessarily make a worker a household employee. You’re not required to withhold or pay nanny taxes for independent contractors — such as occasional babysitters who work for many different families.
However, the rules for distinguishing between employees (who trigger nanny tax obligations) and independent contractors (who don’t) are complicated, so be sure to consult your tax advisor if you’re uncertain.
Which Taxes Must You Pay?
Your nanny tax obligations vary depending on the type of tax:
Income Tax
You’re not required to withhold federal income tax (or, usually, state income tax) from a household employee’s pay, unless the employee asks you to and you agree. In that case, you’ll need to have the employee complete Form W-4 and you’ll need to withhold income taxes on both cash and noncash wages (other than certain meals and lodging). For more detail on federal income tax withholding and how it applies to your household, consult a tax professional. Better safe than sorry!
FICA Taxes
You must withhold and pay FICA taxes (Social Security and Medicare taxes) if your household employee’s cash wages reach a specified threshold ($$2,600 for 2023). If you meet the threshold, you must pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the employee’s cash wages (but not on meals, lodging, or other noncash wages). In addition, you’re responsible for withholding the employee’s share of these taxes (also 6.2% and 1.45%, respectively), although you may opt to pay the employee’s share rather than withholding it.
Note: There is no FICA tax liability for wages you pay to certain family members or to household employees under the age of 18 if working for you is not their principal occupation. A student who babysits on the side would be one example.
Unemployment Taxes
You must pay federal unemployment tax (FUTA) if you pay total cash wages to household employees (other than certain family members) of $1,000 or more in any quarter in the current or preceding calendar year. The tax applies to the first $7,000 of an employee’s cash wages at a 6% rate, although credits reduce that rate to 0.6% in most cases.
Depending on what state you live in, you may also have to pay state unemployment taxes. Tax rate and the wage base differ by state. Check your state’s unemployment agency website for more information about your state’s requirements.
How Are Household Employment Taxes Reported And Paid?
Unlike typical businesses, you generally don’t need to file quarterly employment tax returns for household employees. Rather, you report household employment taxes on Schedule H of your personal income tax return. However, if you own a business as a sole proprietor, you may add the taxes for household employees to the deposits or payments you make for your business employees and include household employees on Forms 940 and 941.
Even if you report household employment taxes on Schedule H, you’re still responsible for paying the tax throughout the year, either through quarterly estimated tax payments or by increasing withholdings from your wages. Otherwise, you’ll have to pay the tax when you file your return and be subjected to penalties for underpayment of estimated tax.
You’ll also need to file Form W-2 if you’re required to withhold FICA taxes or agree to withhold income taxes for a household employee.
Dependent Care Tax Credit
If you employ a person who helps you care for someone else in your household, you need to know about the dependent care tax credit. The dependent care tax credit is a federal tax benefit that helps eligible taxpayers reduce their tax liability for the expenses they incur to provide care for a qualifying person. The qualifying person may be:
- a child under 13 years old
- a spouse who is physically or mentally incapable of self-care
- another dependent who is physically or mentally incapable of self-care and who lives with the taxpayer for more than half of the year
The amount of the credit depends on the taxpayer’s adjusted gross income, the number of qualifying persons, and the amount of eligible expenses. The maximum amount of eligible expenses is $3,000 for one qualifying person and $6,000 for two or more qualifying persons. The credit is calculated as a percentage of the eligible expenses, ranging from 20% to 35%, depending on the taxpayer’s income. The credit is nonrefundable, which means it can only reduce the tax liability to zero, but not create a refund.
Know Your Obligations As An Employer
In addition to the nanny tax requirements discussed above, there may be other obligations that come with being an employer. These may include complying with minimum wage and overtime requirements, and documenting immigration status. For guidance, turn to a trusted tax advisor from Haynie and Company. Contact us now to get started!
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