The Payroll Blog
News, tips, and advice for small business owners
The 1,2,3 on Nanny Taxes
So you’ve hired your first nanny and now you want to know the 1,2,3 about the nanny tax. You don’t want to get that wrong! Sadly for busy moms, who don’t have time to worry about filing schedules and calculations, the nanny tax is a bit more complicated than 1,2,3. Here’s a quick overview for you.
What it is and who pays it?
Whether or not you'll need to pay it depends on a few factors. The Nanny Tax is essentially a "payroll tax" for household employees. There are some exceptions for parents. According to the IRS, you're exempt from paying the nanny tax and the Federal Unemployment tax if your nanny is your spouse or your child under age 21. Another exemption is if your nanny is under age 18 at any point during the year. (This is only an exemption for the nanny payroll tax - not unemployment and that is important!)
Each year there have been changes to the federal guidelines on household employees, so be sure to check it out. For 2014, if your nanny is paid more than $1900 in the year or more than $1000 in one quarter you will likely owe the nanny tax.
What do I do first?
You'll need an employee identification number (EIN), a nine digit number issued by the IRS. Note: This is NOT the same as a social security number. To apply for a number call 1-800-829-4933 or go to IRS.gov for more information.
It is also very important to verify that your nanny is legally eligible to work and ask her to fill out the IRS Form I-9 - it's required. You don't need to file it - but you'll have to keep it on hand while the nanny is in your employ and for 3 years afterward.
Who pays what exactly?
The nanny tax (household employment or payroll tax) is made up of Social Security and Medicare taxes. Here is how it works. Deduct Social Security and Medicare taxes from each paycheck. It is your responsibility to deduct 6.2% for Social Security and 1.45% for Medicare (additional 0.9% in Medicare Tax must be withheld on any wages paid to an employee in excess of $200,000). Some people actually create a separate bank account to hold tax funds. Matching is next - yes, you will have to match those funds you've withdrawn for every paycheck kicking in the same percentages from your own pocketbook.
You'll also owe federal unemployment taxes (FUTA). If your nanny makes $1000 in any quarter, you'll have to pay FUTA. There are a few exceptions - if your nanny is a grandparent, your spouse or your own child under age 21. Otherwise, you'll pay 6% on your nanny's first $7,000 of wages. Be sure you don't deduct any of this from the nanny's paycheck now - this is your responsibility.
What needs to be filed and how does payment work?
You'll need to file a separate Form W-2 for each household employee you pay. You'll give Copies B, C and 2 to your employee by the end of January the following year. You'll send Copy A and Form W-3, Transmittal of Wage and Tax Statements to the Social Security Administration by the end of February the following year if you submit by mail. You get another month making the deadline March 31 if you file the W-2 electronically.
If you don't own your own business, you'll use Schedule H to report the employment taxes, filing this with your federal income tax return by April 15 of the following calendar year. The IRS permits you to make estimated tax payments to cover household employment taxes. You'll need to get Form 1040-ES, Estimated Tax for Individuals. This has payment vouchers with which you can make your payments by check or money order. If you want to pay electronically or by credit card, visit IRS.gov for instructions as the filing dates are different. Otherwise, when you file your federal income tax return you attach Schedule H and add the nanny taxes to your income tax. If you need more information, check out IRS Publication 926.
One important note if you are a small business owner: Be sure not to use Schedule H, instead the IRS allows you to file the Form 941 quarterly. Don't miss the deadlines either because there are penalties and fines for that! Deadlines are April 30, July 31, October 31 and January 31. FUTA can be paid by filing a Schedule H with your personal income tax returns.
Whatever you do, don't fail to file and pay. Not only is it the law, fines and penalties can really cost your family!
Yes it can be complicated!
There are various circumstances and important nuances in the law, it can be complicated. But it doesn't have to be, thanks to online services like SurePayroll.com that do all the calculations, pay your nanny via direct deposit and pay and file the taxes for you. You'll simply enter hours, preview and approve payroll...so in this case the Nanny Tax can be as easy as 1,2,3. SurePayroll also provides a signature ready Schedule H for you at year end.
Full disclosure - I work here so I know how easy we make it to do nanny payroll. But I want to caution, not all services do this - and not all services are easy and affordable - be sure to do your homework if you decide to use a service.