Do You Owe the Nanny Tax?

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Nanny TaxWhen you pay a sitter or a nanny, paying taxes on their wages is probably the last thing on your mind. However, if you have been regularly paying for in-home childcare, you might need pay the “nanny tax,” which aims to collect FICA and FUTA taxes from those who employ home workers.

The nanny tax was instituted in 2009, and the minimum wage amount that you are supposed to pay the tax on is adjusted according to inflation. Right now, that wage amount is $1,700, so if you have paid your childcare professional more than $1,700 in a tax year, you probably owe taxes on the wages you paid a nanny. The IRS recognizes the following exceptions:

  • Your spouse
  • Your parents
  • One of your other children, who is under the age of 21
  • Someone who is under the age of 18 who does not use household employment as a principal occupation

You also probably don’t have to pay the nanny tax if your sitter comes to you through an agency, and the agency pays the sitter (you pay the agency). If you aren’t sure, double check with a knowledgeable tax professional, or consult the IRS web site.

FICA and FUTA Taxes

The nanny tax is the collective name bestowed on the taxes you pay for employing someone to watch your children as a regular household worker. As a household employer, you are required to pay FICA and FUTA taxes on these workers, including your children’s nanny. The employer side of FICA is 6.2% for Social Security and 1.45% for Medicare. Your nanny has to pay these taxes as well. (Although for tax year 2011, s/he only owes 4.2% on the employee side of Social Security.)

There is also a tax for state unemployment taxes. FUTA is 0.8% if you pay by April 15 of the following year. If you are behind on your FUTA payment, you actually have to pay a higher rate of 6.2%. You pay FUTA on the first $7,000 in wages that you pay to your nanny if you pay at least $1,000 in any quarter of the current calendar year or the preceding year.

Filing the Nanny Tax Paperwork

When reporting your nanny tax with your tax return, you use the IRA form Schedule H. You will report the amount you get on Schedule H on the second page of your Form 1040. When you pay the nanny tax — so when you pay your nanny more than $1,700 a year — you will need to issue the sitter a W-2. This means that you will need an Employer Identification Number (EIN). You can receive one of these by filling out and sending in a Form SS-4.

Even if you haven’t paid your nanny $1,700 for the year, if s/he is a regularly employee, you might need to issue a 1099-MISC. You will do this if you paid your sitter at least $600 for the year, and paid $1,699. If you plan to get a child care tax credit, or deduct the costs for some reason (such as a home business cost), you will need the appropriate IRS identification from your childcare provider. You won’t have to pay taxes on the wages you pay, though.

(Photo: AvaJune)

{ 11 comments, please add your thoughts now! }

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11 Responses to “Do You Owe the Nanny Tax?”

  1. Ron C says:

    I’ve dealt with this problem. Bit the bullet. Had a payroll service handle he paperwork. Easily cost us 30 percent more on top of hourly pay. I know everyone deserves the protections and value of workers comp, social sec, etc. But when you are on a tight budget the temptation is to just pay very generously in cash. There should be some middle ground where two desperate families can meet in the middle without breaking the law. Our employee strongly wanted the money and not the protections. We were just cautious and did not take the chance of violating the law.

    • Scott says:

      Good move here. There is no statute of limitations on tax fraud. Not reporting employees can come back to haunt you (and your children) many many years down the road.

      • Ron C says:

        We had a relative who hired a home helper to take care of a parent, paying off the books. The woman was wonderful and stayed on the job for years. When the parent died, she turned him and he had to cough up social security, medicare, workers comp, and serious penalties. I am somewhat relieved that my wife can’t turn me because of exceptions in the law. But sometimes when she gives me the evil eye I have a hard time sleeping in my Lazy Boy chair!

        • Scott says:

          It amazes me the people who think they can get away with doing this stuff “under the table”. All it takes is one unemployment claim by your employee and bam! the government figures out you never paid into the unemployment coffer and you’re in deep trouble.

          What also amazes me are stories I hear around and about in our town (a navy town) where high-ranking military officials and other government officials pay nannies under the table. If the IRS catches this, they will most certainly lose their security clearance and likely their job altogether. Is that worth the money saved on taxes? No way if you ask me.

  2. Scott says:

    “if s/he is a regularly employee, you might need to issue a 1099-MISC”

    Not so sure about this. From everything I’ve seen from the IRS, if someone is a regular employee then they get a W-2. If they do not work on a regular basis, then they are a contractor and get a 1099. The IRS website states that the typical test for this is ask yourself “who sets the hours that the nanny works?” If you do, they are an employee. If they do, then they are a contractor. The IRS got much more clear and strict on this distinction a couple years ago.

  3. Scott says:

    One more comment I will add is for our nanny’s payroll we use QuickBooks Simple Start, available for free, and got the Payroll option added for free as well (for one employee, if you have more than one it will cost you). There’s a couple minor limitations of the software that I would like to correct but overall it’s been a cinch and saved us a ton over using some payroll service.

  4. Jb says:

    Irresponsible reporting. It’s not a “nanny tax,” just straight up employment tax. Get the facts before you start making up new taxes. This is the same as what our employers pay for us even if we aren’t nannys.

    • Jim says:

      That’s true, but it’s known colloquially as a nanny tax.

      • Scott says:

        Exactly. The term “nanny tax” seemed to come around once the IRS put clearer language into their documents regarding in-home child care and starting cracking down on those people who were skirting the law. But people have been household employers forever – gardeners, maids, butlers, cooks, and everything else inside the home.

  5. Scott says:

    Miranda, one more thing you need to add to this article is that Schedule H only covers federal taxes. State taxes must be paid separately, and very often on a quarterly basis. If someone is waiting until they file their federal taxes to handle all of this, it is likely too late to avoid penalties from their state.

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