Hiring household help such as nannies, housekeepers, or caregivers can be a tremendous support for busy families. However, many employers may not be aware of their tax obligations when it comes to paying these household workers. This is where the "nanny tax" comes into play—a set of tax requirements that employers must adhere to when hiring domestic help. In this article, we'll break down everything you need to know about the nanny tax, from who needs to pay it to how to stay compliant.
Who Needs to Pay the Nanny Tax?
First things first, let's determine if you're required to pay the nanny tax. If you pay a household employee (someone who works in or around your home) $2,700 or more in a calendar year, you're generally considered a household employer and are subject to the nanny tax. This applies whether the worker is full-time, part-time, temporary, or even if they're a family member. However, you will not be required to withhold federal income tax.
Calculating and Withholding Taxes
Once you've established that you're a household employer, it's essential to understand how to calculate and withhold taxes for your household employee. You'll need to withhold and pay Social Security tax and Medicare tax from your employee's wages. The employee share, withheld from pay, is half the Social Security tax (6.2%) and half the Medicare tax (1.45%). You, the employer, pay the other half. You also must pay federal unemployment tax on wages of $1,000 or more, this tax is assessed only on the first $7,000 of wages paid.
To pay household worker obligations, increase your quarterly estimated tax payments or increase withholding from your wages. Your tax professional will report the Social Security and Medicare taxes you paid on Schedule H of your individual Form 1040 tax return. For Schedule H, you’ll need to include your Employer Identification Number (EIN), which you can obtain by filing Form SS-4. However, if you won a business as a sole proprietor, you may include the tax for a household worker on your business employment reports, using your business EIN.
Penalties for Non-Compliance
Failure to comply with nanny tax requirements can result in penalties and fines from the IRS. These penalties may include paying back taxes, interest on unpaid taxes, and additional fines for late or incorrect filings. It's essential to take your responsibilities as a household employer seriously to avoid these consequences. Keep track of every paycheck and report and include them in your tax records.
In conclusion, understanding and fulfilling your tax obligations as a household employer is crucial when hiring domestic help. By familiarizing yourself with the nanny tax requirements you can ensure that you're meeting your responsibilities and avoiding potential penalties.
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
