The Payroll Blog
News, tips, and advice for small business owners
Nanny Payroll Part 4: Federal Income Taxes
By now, you’ve learned managing nanny taxes takes a bit of time, number-crunching, and paperwork. Once you’ve determined if you owe nanny taxes, you’re probably responsible for collecting two types of nanny taxes:
- Social Security and Medicare taxes (usually called the "payroll tax")
- Federal unemployment taxes (sometimes referred to as "FUTA" after the Federal Unemployment Tax Act)
Once you've finished all the paperwork and payments for these two taxes (and kept all the records), you may be entirely done because collecting your nanny's federal income taxes is completely optional.
You read that right. According to the IRS Publication 926, The Household Employer's Guide, "You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree."
So what if your nanny asks you to withhold it, and you agree? You have to follow a few steps to collect your nanny's federal income taxes:
1. Ask her to complete an IRS form W4. Keep this form on file as it will help you determine any income tax exemptions when you calculate how much to withhold from her paychecks.
2. Check IRS Publication 15 (Circular E) to determine the amount of federal income taxes to withhold.
3. To submit the payments and the paperwork, you have two options:
a. If you don't own a business, complete Schedule H when you file your personal income tax returns.
b. If you do own a business, you may add your nanny's federal income taxes to either Form 941, Employer's QUARTERLY Federal Tax Return, Form 944, Employer's ANNUAL Federal Tax Return, or Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, depending upon which form your business normally files
If you or your nanny want to stop withholding federal income taxes at any time, either party should end the agreement in writing. As always, check with your state and local governments about their income tax policies for household employers.
You may have to collect other incomes taxes, though it's highly unlikely.
This marks the end of our Nanny Payroll series. By following the steps outlined in these posts, you can manage all federal nanny payroll and nanny tax responsibilities. Of course, you can always use SurePayroll's Nanny Payroll Services and Nanny Tax Services if you'd like to leave it to the pros.