Everything you need to know about "The Nanny Tax"
What is a nanny tax?
Caregiver taxes, commonly called nanny taxes, apply to households who pay an individual to provide services for a child or adult who cannot care for themselves. Some estimates put up to 60% of Americans with some form of nanny or caregiver in their home. With so many families using these services, it’s important to understand tax responsibility and make sure taxes paid correctly and in a timely manner.
Nannies and caregivers are considered employees of a household by the Internal Revenue Service because the family determines their hours, authority and responsibility. Because of this, they cannot be classified as independent contractors or services, unless they perform their duties outside your home. If you have a caregiver or nanny in your home, you are considered a household employer under the tax code, and have filing and tax responsibilities.
What is a household employee?
Household employees are caregivers that include babysitters, nannies and those who care for adults who cannot attend to their own needs. Nannies and caregivers include those outside your family who provide their services in your home. Taxes do not have to be withheld or paid for caregivers who are:
- Your spouse,
- Your child who is under 21,
- Your parent,*
- An employee under age 18 at any time during the year, unless their principal occupation is performing household work. Students under 18 are exempt because providing household work isn't considered a principal occupation.
*If you pay your parent for caregiving services, you are not required to pay FICA/FUTA taxes, however, you may be responsible to issue them a W-2 Form at the end of the year. If you claim a Child and Dependent Care Credit you will need to verify the payments made to your parent with their social security number/tax identification number. Your parent will be required to report the income and may pay FICA and income taxes on their wages.
What nanny taxes have to be paid?
As a household employer, you will need to pay social security, federal and state unemployment, and Medicare taxes. These are typically referred to as ‘nanny taxes’ (even when the caregiver attends to the needs of an adult). You’ll register as a household employer at the federal level through the IRS website. You’ll need to report wages and pay taxes for any caregiver who earned more than $2,300 in 2021 (these amounts can change annually).
Nanny taxes are paid by the employee and the employer. The employee’s share of Federal Insurance Contributions Act (FICA) taxes is 6.2% of their wages for social security and 1.45% of wages for Medicare taxes (7.65%). This money will be deducted from the nanny’s pay. You must also make a matching contribution, paying the same amount as the employee’s share of FICA taxes: an additional 6.2% social security and 1.45% for Medicare. The IRS has a guide for household employers to double-check they’re paying the correct amount, if necessary.
You are not required to withhold federal income taxes for your nanny, but if you choose to, you can do so with a Federal Withholding Certificate Form W-4. State (and sometimes local) taxes may also apply. Check with your local Department of Revenue for regulations, required payments, forms and where to submit.
Under the Federal Unemployment Tax Act (FUTA) you will also be required to pay unemployment insurance for each nanny on your payroll. The tax is necessary for any caregiver who has earned more than $1,000 in any quarter of the year. FUTA tax is assessed on the first $7,000 of cash wages paid to each employee.
At 6% federally, FUTA may be reduced by the amount of state unemployment taxes you are required to pay. Check with your state or local authority on how much and how to pay state unemployment taxes. Employers pay unemployment taxes – state and federal: deductions from your nanny’s payroll are not allowed.
How to file and pay nanny taxes
There will be paperwork to complete for nanny filings and taxes. If you’re managing the paperwork on your own, here’s what you’ll need:
- As a household employer under the IRS code you will need an Employer Identification Number (EIN). You can get one immediately at no charge via the IRS website
- Your nanny will need to complete an I-9 Form to verify employment eligibility
- Form W-2 Wage and Tax Statements for each nanny
- Form 940 must be completed to report FUTA taxes due
- If you withhold federal income taxes, the nanny will need to complete Form W-4
- If you withhold state income taxes, refer to your state’s Department of Revenue for the appropriate form
You’ll need to pay taxes quarterly for federal FICA taxes. You can only pay them online through the Department of the Treasury’s Electronic Federal Tax Payment System (EFTPS) tax payment service. Enrollment and payment information is available on the site.
FUTA taxes are also payable through the EFTPS. You are not required to pay FUTA until the tax due exceeds $500, so you may have to pay quarterly or annually, depending on your nanny’s wages.
Information on your states FUTA forms and where to pay these taxes should be available through each state’s Department of Revenue website.
Nanny taxes can be complicated. Many families turn to payroll services to assure they’re in compliance with federal and state tax codes. These providers typically charge a monthly fee and process all the payroll and taxes for you. Whether you manage nanny taxes on your own or use a third-party provider, it’s important to make sure filings are timely and all taxes are paid to stay in compliance with the law; make sure your nanny has be paid and taxed correctly; and assure any childcare deductions you make to your own taxes are allowed.