Nanny Tax

Nanny Tax refers to the taxes levied on the homeowners who hire house assistant, especially a caregiver or babysitter for their kids. He families that employ a personal employee at home must fulfil this tax requirement as specified by the Internal revenue Service (IRS) under the IRS Publication 926. This provision makes an individual liable to pay taxes to the government for having gardeners, housekeepers, babysitters, and cooks at their place.

Nanny taxes are beneficial for both the parties involved in the process. The one, who is the household employee, has an authentic employment to record. On the other hand, the employer gets a chance to enjoy tax credits applicable for expenditures made on childcare.

Nanny tax is the tax levied on the homeowners who hire household worker or household employee, which is a formal term used for any household help one keeps, be it is personal assistant or a babysitter or gardener. According to the IRS, a household worker is the one hired by a homeowner, who not only monitors or controls the activities the worker carries out or conducts, but also tells them how to do them.

Having a household worker or a nanny would make owners liable to pay these taxes, irrespective of the duration or hours of work they perform for the latter or the mode of employment, which could be both physical or online. The families that hire household workers have to pay these taxes under the IRS Reduction 926. The families either pay or withhold the tax amount to fulfil their tax liability. An IRS nanny tax covers federal taxes, including Social Security, Medicare, and unemployment taxes.

To note here is that not all nannies are considered household worker and are it is not necessary for them to be eligible to pay for these taxes. IRS defines and categorizes nannies into two types – self-employed caregivers and household workers.

The former is the one who performs their duties as per their own schedule and bring their own tools to carry out their tasks. The self-employed caregivers serve the public and are not confined to one household only. The next is the household worker, who is the one controlled by the owners themselves, The owners who hire them tell them what to do, how to do and when to do. Suppose a family hires a housekeeper for housekeeping service, and his wages are $4000 yearly. The family will deduct some as social security medicare taxes and federal and state income tax and pay it to the government. The family will also pay social security medicare taxes and federal and state unemployment insurance to the government.

There are some important reasons why one should pay the nanny tax.

• It is a legal requirement of a family or individual who hires house workers.
• It can provide childcare tax credit benefits.
• It provides social security at the time of retirement of household employees.
• If an individual removes his cook, the cook can get unemployment benefits for losing his job.
• If an individual pays taxes legally, his house worker can get a medical care subsidy.
• Paying a nanny tax will motivate the worker.
• If an individual pays tax regularly and legally, his workers will be eligible for medical care after retirement.

The employer should first have his identification number, which he can obtain from the IRS.

There are the steps you need to follow for nanny tax –

1. Before hiring a housekeeper, the employer must obtain the following documents.

• Employers must take the Housekeeper's social security number or ITIN.
• Employers need to obtain a completed form of Form I-9 with the correct identification number from housekeepers because Form I-9 shows the eligibility of a household worker.
• Employers must obtain a federal W-4 form and a state income tax withholding form.

2. An employer needs to obtain a tax ID number.

• An employer needs to obtain a tax ID number, such as federal and state identification numbers, from the respective tax department of that state.

3. Calculate taxes withheld from worker and employer taxes

• Calculating taxes withheld from worker and employer taxes based on wages paid to household employees would be best. This can be done by hiring some experts or employers. Employers will pay withheld tax along with their income tax to avoid penalties on the underpayment of tax.

4. File the return either quarterly, annually, or monthly

• You need to file the return quarterly, annually, or monthly as per the prevailing law of that state and send Form 1040 about the estimated payment to the IRS four times per year.

5. An employer must provide Form W-2 to his household employees at the end of Jan each year so that employees can use it to file their tax returns.

• File Form W-3 as per social security administration and submit form W-2 part A.
• Prepare Schedule H; employers must fill it with their federal income tax.
• Prepare the Annual reconciliation statement that summarizes withheld tax from a nanny.
• Employers must keep track of any changes in nanny taxes.
• Employers need to reply to any federal or state notices.

There are two kinds of taxes that require to be paid.:

• Taxes withheld from household employees such as social security medicare taxes, also known as FICA taxes, and the same amount employers will also pay to the government.
• Employers will also pay Employment tax, such as federal unemployment insurance tax. Then the employer will file the return on a monthly basis, annually, or quarterly basis.

If you hire a cook, babysitter, gardener, housekeeper, any person for household work, and pay wages, which falls under the provision of law, then you need to pay nanny taxes.

Let’s understand this concept with the help of some examples.

Example 1

Suppose a family hires a cook, and if the employer pays wages more than $2100 in a year, then the employer is required to withhold tax. Social security medicare taxes, also known as FICA @ 7.65% of cash wages, and the employer will also pay 7.65% FICA taxes.

Suppose the family pays wages of $1000 or more per quarter to its household employees, then the employer must pay 6% of the first $7000 wages per employee as federal unemployment taxes.

Example 2

For 2024, IRS has modified its threshold for the Social Security Medicare Taxes or Federal Insurance Contributions Act (FICA) taxes, which directly affects the nanny taxes. According to the latest update, if one pays a cash wage of $2,700 or above to a household employee, including a nanny, they must withhold 6.2% and 1.45% for Social Security and Medicare tax liabilities, respectively, accounting for a total tax withheld of $7.65%. This threshold of $2,700 or above has been fixed for 2024 and is subject to change every year.

Paying nanny tax is the legal duty of each household employer who hires household employees. Each employer should follow the government’s guidelines, pay nanny taxes regularly, and file their return to avoid being unethical. Each employer should maintain proper books of accounts for better control purposes.

A nanny tax is beneficial for both the parties involved, i.e., the one who hires and becomes the employer and the one who gets hired and becomes an official employee on records. Let us check the benefits of these taxes in brief below:

• The major advantage of paying nanny taxes is that the employer can take a tax credit of the same and reduce his tax liability. Employers will save lots of tax liability by doing this.
• Household employees will enjoy medical benefits and social security.
• Household employees will have an advantage when applying for any loan, such as car loans, education loans, and mortgage loans.
• By paying nanny taxes, employers can save themselves from income tax notices.
• Household employees will be motivated and feel secure.
• The housekeeper can get extra benefits like their children's tuition fees and transportation expenses.
• Parents who hire a babysitter and pay nanny taxes can claim child care credit.
• By paying nanny taxes, an employer running a business can avoid legal notice.
• It builds a good relationship between the employer and household employees.
• If an employer hires them to care for his parents, they can claim a nanny tax deduction for this payment.

A nanny should be paid when they are recognized as a household worker per the IRS. The following, if taking care of a child or be an assistant for the household, do not make individuals liable for nanny taxes:

• One’s spouse
• Anyone under 18 years unless caregiving is their profession.
• A sibling under 21 years of age.
• One’s parents

However, in case of parents, there are two points that must be collectively considered for them to be liable for nanny taxes. Let us have a look at those conditions below:

• If one’s parents are caregiving or providing childcare services to children under 18 years or they are attending to mentally or physically retarded kids of 18 or above who are unable to take care of themselves for more than four weeks in a row in a year, and
• One is divorced or widow/widower or not remarried or has a spouse with disability – being reasons of not being able to take care of a child for four weeks in a row in a year.

Given the two-conditioned point above, it needs to be noted that if any one of the above applies, individuals will remain exempted from paying this tax. On the contrary, if both applies, the nanny tax must be paid.