When you choose to hire a nanny, you find yourself in the position of being a household employer. With this comes the responsibility to accurately pay your nanny. Calculating, filing and paying your nanny’s payroll can be intimidating and confusing, but avoiding these important tasks will only hurt you, and your nanny, in the long run.
By properly paying the nanny tax:
Nanny taxes are the payroll taxes household employers are responsible for withholding and paying when they employ a household employee, such as a nanny. The nanny tax refers to Social Security and Medicare taxes that household employers are required to withhold (and pay) for each paycheck. Under tax law, your nanny is considered a “household employee” because you control what work he or she will do or set requirements on how that work will be done.
Here is a quick breakdown of the nanny tax criteria:
You are not required to pay the nanny tax if your nanny is:
More detail on these exceptions can be found in IRS Publication 926.
When paying Social Security and Medicare taxes, it’s important that you withhold the following amounts and personally set aside the same amount to match:
EXAMPLE: If your nanny makes $1000 each week, you should withhold $76.50 from each paycheck and pay your nanny the remaining $923.50. You’ll then contribute $76.50 of your own money to pay your share of the taxes.
The FUTA tax amounts to 0.6% of FUTA wages. “FUTA wages” are capped at the first $7,000 of your nanny’s cash wages during the year. In other words, you will not owe more than $42 for your nanny’s FUTA tax. You may be required to pay state unemployment taxes for your nanny. This varies from state to state so be sure to check the rules in your state.
EXAMPLE: If you pay your nanny $1,000 each week, this makes their first quarter wages (January-March) come to a total of $13,000, which is more than the $1,000-per-quarter limit we discussed earlier. So you will be paying FUTA taxes. At $1,000 per week, your nanny’s annual salary is $52,000 therefore 0.6% on the first $7,000 means you’d pay $42 for FUTA taxes for the entire year.
When it comes to payroll and taxes, multiple forms are going to be needed to report the wages you pay your household employee, and the taxes you withhold.
Now that you are a household employer you need an Employee Identification Number(EIN). Fill out Form SS-4 or apply online through the IRS to obtain your EIN.
Fill out Form W-2 if you pay Social Security and Medicare wages of $2,600 or more. W2’s must be given to household employees by January 31 each year so they have enough time to file income taxes.
Form W-3 is the Transmittal of Wage and Tax Statements that you send to the Social Security Administration to show the total earnings, Social Security wages, Medicare wages, and withholding for all employees in the previous year.
This form is for your nanny to fill out. Though you are not required to withhold employment taxes from your nanny’s pay – he or she may ask you to. This form details the correct number of allowances for your nanny.
If you pay your nanny cash wages of $2,600 or more file Schedule H. You will attach this to Form 1040 when filing taxes.
Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment.
This is one of three IRS forms used for personal income tax returns.
Whether you get a tax credit or take advantage of a flexible spending account (FSA), there are significant tax breaks for families employing a nanny. In fact, many families realize that their tax liability can be greatly reduced by $250 to $1,200 per year by exploring the following:
When you pay your nanny legally, both parties gain access to a variety of benefits. Not to mention the fact that this gives you peace of mind in knowing that you are adhering to all federal and state tax laws.
If nanny taxes still make you nervous or sound like a lot more time than you want to spend on paperwork, choosing to outsource your nanny payroll can be a wise choice. Some highlights of using SurePayroll for your household employee payroll needs are: