Arranging Household Help – “Nanny Tax” Law
It’s challenging enough to find the right person to care for your child in the home without having to worry about the tax complications of becoming a household employer. Although the rules have been liberalized in some ways, other requirements are just as stringent as they’ve always been. Here’s a snapshot of what you must do to steer clear of trouble with the IRS when you hire someone to take care of your children in the home.
Social Security and Medicare tax (FICA). If you have household workers, you are required to withhold and pay FICA taxes if cash wages paid during the year total $2,000 or more. There is one limited FICA exception for wages paid to household workers who are under 18 (the so-called baby-sitter exception). Social security and Medicare tax doesn’t apply at all to these workers if domestic work is not their principal occupation. This exception may help with steady evening and weekend baby-sitters, but otherwise it’s not important to those parents who need help with children during the day.
You are required to file a Form W-2 for every domestic employee whose wages are subject to the social security tax. And you will need to get an Employer Identification Number for yourself, which is not the same as your social security number.
If you pay the employee’s share of Social Security taxes in addition to your share rather than have the employee incur that expense, you or the employee won’t need to pay additional social security taxes on that amount. The employee, however, will be considered to have additional income for income tax purposes.
Unemployment tax (FUTA). You must pay the FUTA tax for any household worker whom you pay $1,000 or more in a calendar quarter. The effective FUTA tax rate varies state-by-state. We can give you all the details.
Federal income tax withholding. You are not required, but your household employee can ask you to withhold federal income tax.
State considerations. There may be other tax complications as well. For example, depending on state law, many employers of household help may have to file and pay state unemployment insurance tax for each quarter in which the state wage threshold is reached. And the rules may be somewhat different if you have other employees.
Payroll tax paperwork. The FICA and FUTA you owe for any household employee is computed on Schedule H of Form 1040 and included in your tax liability. Not reporting and paying the “nanny tax” is income tax evasion.
At the beginning of each year you must estimate the total amount of FICA, FUTA and federal income taxes that will be owed with regard to any domestic employees you will employ during the year. This amount, which includes both the employer’s half and the worker’s half of the FICA taxes, must be added to the amount withheld from the employee’s paycheck or to the employer’s quarterly estimated income tax payments.
As you can see, the tax rules for child-care help are complicated. We are in a position to advise you of the least troublesome way to take care of all your tax responsibilities. Please do not hesitate to call if we can be of assistance to you.