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The Nanny Tax
June 3, 2013
Now that school has ended and the kids are home for the summer many families will be hiring part-time or full-time help to look after their children. It is important to be aware of what is commonly called the “nanny tax” when hiring a babysitter or nanny for an extended period of time. Depending on how much you pay your babysitter/nanny you may owe Social Security and Medicare taxes (FICA) and/or the Federal Unemployment Tax (FUTA). The first thing to determine is whether the person hired to look after your children is a “household employee.” Your babysitter/nanny is a household employee if you control what work is done and how the work is done. For example, if the person providing childcare services does so out of their own home, they would not be your household employee. If your babysitter/nanny is a household employee and you pay him/her over $1,800 in wages in a year then you must withhold AND pay social security taxes and Medicare taxes for ALL wages paid. The employer’s share of the social security tax is 6.2% and 1.45% of the Medicare tax for a total of 7.65%; this is the amount you must pay. You should also withhold 7.65% from your household employee’s paycheck to cover his/her share of the employment taxes (again 6.2% for social security and 1.45% for Medicare). IRS Publication 926 (available here) provides a table illustrating how much should be withheld depending on the amount paid. Employment taxes are not owed (even if you pay wages exceeding $1,800) if your babysitter/nanny is: your spouse; your child under the age of 21; your parent; or ANY child under the age of 18. If you pay your babysitter/nanny over $1,000 in any calendar quarter then you must pay the Federal Unemployment Tax of 6% on wages paid for the first $7,000 of wages. You may also owe money to your state unemployment agency. Unemployment taxes are not owed (even if you pay over $1,000 in a calendar quarter) if your babysitter/nanny is: your spouse; your child under the age of 21; or your parent. Note that you as the employer are NOT required to withhold federal income tax from your babysitter/nanny’s paycheck, though you can if you both agree to this arrangement. Social Security, Medicare, and Federal Unemployment Taxes paid to household employees are reported on Schedule H of your 1040. Since these taxes are part of your personal tax liability it may be a good idea to file quarterly estimated payments to avoid underpayment penalties if you know you will owe either tax. Lastly, if you do have to pay FICA and/or FUTA taxes because of wages paid to a babysitter/nanny, you will need to get an Employer Identification Number which can be obtained online through the IRS’ website or obtained by filing a Form SS-4. Until next time, Brennan