During the pandemic, more than a few families have hired household workers while schools in
many areas have gone virtual and some day care centers have had limited availability. If you’ve
done so, be sure you know the nuances of the “nanny tax.”
Withholding taxes
For federal tax purposes, a household worker is anyone who does household work for you and
isn’t an independent contractor. Common examples include housekeepers, child care providers
and gardeners.
If you employ such a person, you aren’t required to withhold federal income taxes from the
individual’s pay unless the worker asks you to and you agree. In that case, he or she would need
to complete a Form W-4. However, you may have other withholding and payment obligations.
You must withhold and pay Social Security and Medicare taxes (FICA) if your worker earns
cash wages of $2,300 or more (excluding food and lodging) during 2021. If you reach the
threshold, all wages (not just the excess) are subject to FICA.
However, if your worker is under 18 and child care isn’t his or her principal occupation, you
don’t have to withhold FICA taxes. Therefore, if your worker is really a student/part-time
babysitter, there’s no FICA tax liability.
Both employers and household workers need to pay FICA. Employers are responsible for
withholding the worker’s share and must pay a matching employer amount. FICA tax is divided
between Social Security and Medicare. Social Security tax is 6.2% for both the employer and the
worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9%
total). If you prefer, you can pay your worker’s share of Social Security and Medicare taxes,
instead of withholding it from pay.
Reporting and paying
You pay nanny tax by increasing your quarterly estimated tax payments or increasing
withholding from your wages rather than making an annual lump-sum payment. You don’t have
to file any employment tax returns — even if you’re required to withhold or pay tax — unless
you own a business. Instead, your tax professional will report employment taxes on Schedule H
of your individual Form 1040 tax return.
On your return, your employer identification number (EIN) will be included when reporting
employment taxes. The EIN isn’t the same as your Social Security number. If you need an EIN,
you must file Form SS-4.
However, if you own a business as a sole proprietor, you must include the taxes for your worker
on the FICA and federal unemployment tax forms (940 and 941) that you file for your business.
You use the EIN from your sole proprietorship to report the taxes. You also must provide your
worker with a Form W-2.
A keen awareness
Retaining a household worker calls for careful recordkeeping and a keen awareness of the
applicable rules. Contact us for assistance complying with your nanny tax obligations.