Nanny Taxes and the Household Employee Designation
A foray into the initially confusing world of nanny tax info begins with an understanding of the household employee designation that the Internal Revenue Service (IRS)(1) recognizes. Nannies – even if a parent personally refers to them as babysitters, caretakers, housekeepers or domestic childcare workers – may fall under the heading of household employee.
As a general rule of thumb, a nanny is a household employee – and therefore subject to the nanny tax – if the childcare provider:
- Is hired by a taxpayer either full- or part-time through an agency, referral list or in any other manner
- The taxpayer is in charge of what work the nanny does and also how the work must be done
- The taxpayer pays the nanny a wage (hourly, daily, weekly or in any other manner)
By the same yardstick, a nanny is not a household employee, if the taxpayer is not in control over the “how” of job performance. A good example is the family daycare provider who takes care of children from one or more families at a private residence. In this case, the nanny is self-employed and the taxpayer’s relationship with the childcare provider is one of independent contractor and client.
Agencies: The Grey Area?
It is a persistent rumor that nannies coming from an agency do not fall under the nanny tax heading. This is largely untrue. There are only two exceptions:
- The nanny is an employee of the agency and provides childcare in the homes of clients as part of the job.
- The agency, not the taxpayer, controls how the job is to be done. Moreover, the nanny may bring agency-owned childcare supplies, toys and food. The taxpayer has no say over the minute details of the care the child receives.
How to Calculate the Nanny Tax
So how much does the nanny tax work out to be? Once the taxpayer has identified that the childcare provider is a household employee – whether the workers are identified as a babysitters, nannies or au pairs – and paying nanny taxes is a must, it is time to look for up to date tax tables. Keep in mind that, when filing taxes for a nanny, social security and Medicare taxes are part and parcel of this arrangement.
The Social Security Administration (SSA)(2) explains that taxation rules only apply to workers over the age of 18 and if the total amount of wages paid exceeds $1,700 (in 2009 and 2010). This amount increases occasionally. The IRS(3) further advises that the employer must also pay federal unemployment tax (FUTA) for the nanny.
No Need for a Nanny Tax Calculator
The calculations are surprisingly simple. If the taxpayer pays $1,700 or more (in a year) to a nanny who is a household employee, social security and Medicare withholdings total 15.3 percent. The taxpayer may opt to have the nanny do the withholding in the amount of 7.65 percent (6.2 percent are earmarked for social security and 1.45 percent go into the Medicare account) or do it for the worker and pay the entire amount.
If the taxpayer remunerates the nanny to the tune of $1,000 or more per quarter, a FUTA in the amount of 0.8 percent is due. In this case, there is a good chance that the employer must also pay state unemployment tax, as determined by local taxing authorities
Filing the Taxes
While explaining nanny tax info, it is useful to also touch on the filing requirements. At the beginning of the coming year – usually by the last day of January – the employer must issue a W-2 for last year’s earnings to the nanny.
- The childcare worker receives copies B, C and 2 of the form.
- The SSA receives copy A.
The employer must file a personal tax return and include a Schedule H with Form 1040. Please remember that it is not necessary to withhold the nanny’s federal income tax, unless the childcare worker specifically requests it.
Photo credit: “Latvian nanny” by Johann Christoph Brotze/Wikimedia Commons at https://commons.wikimedia.org/wiki/File:Latvian_nanny_by_Brotze.jpg