Nanny Tax: Not What Fran Drescher Had in Mind

Q: Tax Playa, I have a nanny come by to take care of my kids, and I pay her out of pocket.  Should I be worried about owing any sort of "nanny tax"?
Jen, Washington DC

A: Yes, you should.  Don't take my word for it.  Bill Clinton's first two attorney general nominees (Zoe Baird and Kimba Wood, for trivia buffs) were scuttled because they didn't pay taxes on their "household employees."  You must pay payroll tax for any household employee you hire...

For more information on this topic, please consult IRS Publication 926, Household Employer's Tax Guide.

If you hired someone to do household work and controlled the work he did and how he did it, you are a household employer.  Examples of household work include but are not limited to: babysitters, caretakers, cleaning people, drivers, health aides, housekeepers, nannies, private nurses, and yardworkers.

If you hire a corporation or other separate tax entity (as opposed to a person), you don't have anything to worry about in this respect.  It also goes without saying that you can get into a lot of hot water for hiring an undocumented worker who may be here without legal status.

If you pay a household employee more than $1500, you need to withhold and pay Social Security and Medicare taxes.  If you pay a household employee more than $1000 in any calendar quarter, you also need to pay federal unemployment tax.  State payroll taxes may also apply, and usually do.

For purposes of federal unemployment tax, do not count your spouse, your under-21 child, or your parent.  For purposes of Social Security and Medicare taxes, also do not count anyone under the age of 18.

It is up to you whether you want to withhold federal income tax for the household employee.

You will need to get an employer ID number if you are a household employer and include it on the special Schedule H form.  This can be done easily and automatically at the IRS.gov website.  You will also need to file a W-2 with the Social Security Administration and give a copy to your employee if you paid more than $1500 in cash wages or withheld income tax.

How Most Taxpayers Can Be Compliant

Most of the time, the situation for taxpayers is that they have paid a gardener or a maid/nanny a few thousand dollars over the course of the year.  These situations are easily dealt with at tax time.  There is normally no need to do quarterly filing.  At most, a W-2 may have to be given to the employee and filed with SSA in January if more than $1500 was paid.  An EIN will have to be obtained, and you'll need to register with your state employment commission to pay state unemployment tax.

As an attachment to the employer's 1040, the Schedule H is added and extra tax is tacked on.  The purpose of the Schedule H is to remit payment to the government for Social Security, Medicare, and unemployment tax.  On the first two, you are paying both halves of Social Security and Medicare tax.  As a result, you should withhold half of this tax from the money you give your employee.  Their half of Social Security and Medicare tax will be 7.65% of their wages, so withhold $76.50 for every $1000 you pay them.

If you qualify otherwise, the cost of having a household employee counts toward the child and dependent care tax credit (see the topical index to the right for more on this).

Comments

[Kathy Webb]

Nanny employers typically have to file state tax returns in addition to the annual Schedule H. Nanny compensation run 20K - 40K and higher, and is subject to unemployment taxes.

In my experience, when the family employs a full time caregiver (nanny/housekeeper/elder companion) they will typically offer to withhold that worker's income taxes also so there are no unpleasant surprises at the end of the year. This may cause one additional state filing per quarter, depending on where the employment is.

The FAQ at 4nannytaxes.com covers this and other Nanny Tax details and is freely available to the public.

[AL]

If my parent and I share a home (receives mail at address and is on the title/deed) and that parent babysits and home schools my child, is parent considered self employed. In other words, the parent controls what is taught and how and when (because she is a former teacher) and uses her own supplies for teaching, babysitting, etc. We own two homes together in two separate states. I am divorced.

[AL]

My mother and I live together. We consider ourselves co-owners of two residenses in two separate states. I have a child that my mother babysits, home schools. Since we share a home, is she considered self employed? She controls how and what and when teaching is performed (she is a retired school teacher). She sets the schedule and plans the day for other activities with my son. She cooks for him and controls the environment. I was wondering since we don't have a separate residence where she comes to "my home" because it's our home, if this constitutes self-employed vs the nanny tax.

Thanks,
AL