The Complete Guide to The Nanny Tax and Payroll

Understanding Nanny Payroll Taxes

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:

• You’ll avoid paying costly fines and penalties (which could reach up to $25,000).
• You’ll protect yourself as an employer.
• You’ll help your nanny build their employment history.
• You’ll ensure that your nanny gets the Social Security and Medicare benefits he or she is entitled to when retired.
• You’ll ensure your nanny can receive unemployment benefits when your children no longer require their care.

What Are Nanny Taxes?

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:

• If you will pay your nanny $2,700 or more in 2024, you must withhold and pay Social Security and Medicare on all their wages.
• If you will pay your nanny $1,000 or more in a quarter in 2024, you must pay the federal unemployment tax or FUTA. You may also owe state unemployment taxes.

Are There Any Exceptions to the Nanny Tax?

You are not required to pay the nanny tax if your nanny is:

• Your spouse
• Your child under the age of 21
• Your parent
• Any employee under the age of 18

More detail on exceptions can be found in IRS Publication 926.

Paying Social Security and Medicare Taxes

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:

• Social Security rate is 6.2%
• Medicare is 1.45%

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.

Paying Federal Unemployment Tax (FUTA)

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.

Additional Payroll Taxes

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.

Nanny Tax Forms and Payment

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.

Form SS-4

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.

Form W-2

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

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.

Form W-4

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.

Schedule H

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

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.

Form 1040

This is one of three IRS forms used for personal income tax returns.

Tax Credits Can Help!

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:

• Dependent Care Flexible Spending Accounts. Check with your employer because some companies offer these accounts (sometimes called “cafeteria plans”) which allow employees to contribute a certain amount of their pre-tax salary if it will be spent on qualifying payments like childcare.
• Child and Dependent Care Credit. This can provide you with up to 35% of your childcare costs in the form of a tax credit, depending on your adjusted gross income. To receive this credit, you must include Form W-10 and Form 2441 with your annual federal tax return. There are restrictions on both options according to federal law, so investigate your eligibility.

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.

How SurePayroll Can Help

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:

• Federal, state and local payroll taxes paid and filed accurately.*
• A signature-ready Schedule H to attach to your annual 1040.
• 1040-ES filed on your behalf.
• W-2’s provided at year-end. Most W-2’s are delivered to customers by January 2 so you have time to distribute to employees.
• Run payroll online while no matter where you are from your mobile device.
• Support from our U.S.-based customer care team with evening and weekend hours, available by phone, email, or online chat.
• Integrations with popular time-tracking and accounting applications.
• Access to affordable supplemental services like pre-employment screening, health insurance, workers’ compensation, and retirement plans.