Nanny Payroll Part 2: Social Security & Medicare Taxes
Now that you know you’re responsible for paying the nanny tax, it’s time to roll up your sleeves, fire up your adding machine, don your green visor, and get to work.
So, what taxes, exactly, are you responsible for paying and filing? It's a good question, and you're not the only one asking it. The "nanny tax" is actually a combination of taxes. But the first ones you'll want to start with are Social Security and Medicare Taxes — usually referred to as the "payroll tax."
Following these steps will keep you in compliance for these important nanny taxes.
1. Verify your nanny is legally eligible to work in the United States.
Ask her to fill out IRS Form I9, the Employment Eligibility Verification. You don't need to file this form, but you must retain it for three full years after your nanny is no longer an employee.
If your nanny can produce the necessary documentation, congratulations: You're now an unpaid tax collector.
2. Start collecting Social Security and Medicare taxes from each paycheck.
As a household employer — the IRS term for someone who employs a qualifying nanny — it's your sole responsibility to collect Social Security and Medicare taxes from your nanny's paychecks.
Deduct 4.2% of your nanny's pay for Social Security (6.2% in 2012 and beyond) and 1.45% for Medicare from each check. You should probably create a separate bank account for these funds. Check with your bank to see what type of account is best designed to hold these tax funds.
3. Match the Social Security and Medicare taxes from each paycheck.
Yes, you read that right. In addition to withholding these taxes, you'll need to match them every paycheck. You'll need to kick in 6.2% for Social Security taxes and 1.45% for Medicare.
You may wonder why your nanny pays 4.2% for Social Security when you're contributing 6.2%. The tax compromise bill signed into law in late 2010 gives employees a 2% break in Social Security Taxes during 2011. They began paying 6.2% again in January 2012.
4. File a 941 every quarter.
The IRS requires you to file Form 941 on a quarterly basis. To make sure you never miss a deadline, mark these due dates on your calendar:
- April 30
- July 31
- October 31
- January 31
If your net taxes for the filing quarter are under $2,500, you'll send payment with your 941 Form. If not, you'll need to pay by electronic funds transfer.
Collecting the tax money is the easy part, but you may want to ask your accountant to look over your 941s if you have any doubts. IRS Publication 926 covers the ins and outs of household employer responsibilities and may answer your nanny payroll questions.
Unfortunately, Social Security and Medicare taxes aren't your only nanny tax responsibility. In our next post, we'll walk you through another big nanny payroll task: federal unemployment taxes.