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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.
By properly paying the nanny tax:
Nanny taxes are the payroll taxes household employers are responsible for withholding and paying each paycheck when they hire a household employee, such as a nanny. Required taxes include Social Security and Medicare(FICA). You may also need to withhold and pay federal and state income taxes as well as local taxes, depending on where you live. 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 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 $1,000 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 standard FUTA rate is 6%. It is capped at the first $7,000 in wages paid to each employee. However, all employers, including household employers, may receive a credit of 5.4% for complete and timely payment of state unemployment taxes. This brings the net federal tax rate down to 0.6%. Applying this rate to the first $7,000 of wages for each employee results in a tax of up to $42 per employee. 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.
You may also need to withhold and pay federal and state income taxes as well as local taxes, which vary based on where you live.
When it comes to payroll and taxes, you will need multiple forms to report the wages you pay your household employee and the taxes you withhold.
As 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 $2,700 or more. W-2’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.
Your nanny fills out this form. 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 $2,700 or more file Schedule H. You will attach this to Form 1040 when filing taxes.
Form I-9 is used to verify 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. Many families realize their tax liability can be reduced by $250 to $1,200 per year by exploring:
When you pay your nanny legally, both parties gain access to a variety of benefits. It also gives you peace of mind knowing that you are adhering to 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, outsourcing your nanny payroll can be a wise choice. Benefits of using SurePayroll for your household employee payroll needs include:
Small businesses and households get 6 months free!*