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Do You Owe the Nanny Tax?

When 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:

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 [3].

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 [4] 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 [5], 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 [6])