Nanny Tax : Do You Have to Pay Taxes for a Caregiver ?

Nanny tax is federal withholding tax including social security and Medicare employment taxes that you become responsible to deduct at source and deposit to treasury from the payments made to a household employee . In other words, Internal Revenue Code considers you an employer for a nanny that you hired for your kids and him/her as your employee.The rational behind treating Nanny or Caregivers as your employee is that the Individual/family who hired them has the right to tell the caregivers what needs to be done. This job contract fulfills employer-employee relationship between them. So, IRS rules for tax withholding and other social security and Medicare employment taxes withholding laws also apply on you .

What if Nanny is a Family Member ?

Special rule applies in case the nanny or caregiver is your spouse, parent, or child (or a non-related student under age 18) . The first rule is that the payment to family member for being caregiver is not subject to withholding tax . Even if your family caregiver is not considered your employee, the caregiver who earned from you , must still report the compensation as income on his or her Form 1040, and may be required to pay self-employment tax depending on the facts and circumstances. Please read Publication 926, the IRS’s Household Employer’s Tax Guide, for more information

When is Nanny Tax Not Payable?

You dont need to pay Nanny Tax in following circumstances

  • If you take your kids to a day care center or to someone’s house, you don’t have to pay nanny tax because , in such cases ,the child care workers may be employees of the day care center, independent contractors or part of another type of business.
  • If your child is cared for by your relatives like spouse, your child under age 21, your parent, or any child under 18, and you pay them for caregiving service .
  • If you are paying to a high school student for Nanny or babysitter services .

Nanny Taxes Threshold 2019

The threshold for paying & complying with nanny tax for 2019 remain same as 2018 .Employers paying a single household employee more than $2,100 annually , is required to pay FICA taxes and issue Form W-2 to the employee.  However,you must pay employment taxes if you pay your nanny – or any household employee: a total of $1,000 to your employees during any quarter

How to Pay the “ Nanny Tax ”

Household employers file and pay the exact same employment taxes as commercial employers do. Form 1040 Schedule H is for the household payroll tax reporting.

Step 1:

Collect certain informtion and statements from your caregiver

  • His/her Social Security number or an Individual Taxpayer Identification Number,
  • Ask him/her to give you a completed Form I-9
  • A completed federal Form W-4,
  • A state income tax withholding form (if your state has an income tax).

Step 2: 

If you and the employee have agreed for tax withholding ,you need to deduct & deposit the tax . Please consult the tables in IRS Publication 15, Employer’s Tax Guide, to determine the correct amount to withhold.

In addition, you should withhold 7.65 percent of the wages to cover the Social Security and Medicare taxes your employee has to pay and add 7.65 percent of each employee’s wages to Social Security and Medicare taxes from your side.So basically , you need to deposit 15.3 % per employee !

Remember you don’t have to deduct social security or Medicare taxes from payments of caregiver service to your spouse or son or parent or anyone under age 18.

Step 3: 

Pay estimated tax payments each quarter or increase the amount of income tax your employer withholds from your pay . This is important for avoiding interest & penalties.

Step 4: 

You should file Schedule H, Household Employment Taxes, with your individual income tax return. On Schedule H, you’ll report:

  • Federal income tax you withheld from your employee’s pay.
  • Federal Unemployment Tax (FUTA) if you paid cash wages to household employees totaling more than $1,000 in any calendar quarter during this year or the prior year.
  • Social Security and Medicare tax.

Step 5: 

At the end of the year, complete Form W-2 for each employee and provide copies to them. You must also send a summary Form W-3 to the IRS.

File Form 941 If You Have Proprietorship Business

The household employers are required by IRS to report Nanny Tax or babysitter employees payments using form Schedule H of Form 1040 which is an annual exercise . But the household employers who are sole proprietors of a business or farm can include their household payroll on the 941, 943 or 944 return (See Publication 926). So , household employers who run a sole proprietor business , must files Form 941 to report taxes and not Schedule H. Some important points related to filing of 941 are:

  • Form 941must be filed and paid every quarter.
  • Even if there was no household payroll in a quarter, you must file form 941 , because failure to file 941 will trigger penalties.

Is Nanny Tax Deductible ?

The answer is YES. You can claim child care tax credit which allows you to itemize up to $3,000 in care expenses per child per year provided you pass the ‘tests’ set by IRS .Essentially these tests mean:

  1. the caregiver must be employed to care for a qualifying person
  2. You (and your spouse if married) must have earned income; and
  3. The nanny’s care must be required so you can work.

Please read more article on child tax credit