Nanny Taxes 101

Everything you need to know about nanny taxes

(but were afraid to ask!)

One of the first questions a family might ask themselves before hiring a homepair is whether they have to pay ‘nanny taxes’ (household employment taxes covering social security, medicare and unemployment).  The short answer is – Yes.   The good news is that they are not as complicated or scary as you think, there is a wealth of information on the web to help demystify them (least of all the IRS’s own guide for household employers), and childcare tax breaks often offset most, if not all, taxes anyway.  Here’s a short guide that we hope gives you some answers to the basics.

Please also check out these summaries of Labor Laws covering minimum wage, overtime, leave and other considerations for your home State:

> CT State Labor Laws

> NJ State Labor Laws

> NY State Labor Laws

(we’ll remind you of these rules when you book somebody and build your childcare agreement!)

Employment Classification

Families are classified as household employers when they hire someone to work for them who is under their direct control (meaning they work in your home, follow your schedule and your rules).  Nannies, housekeepers, maids, elderly caregivers, babysitters, chefs, homepairs…in the IRS’s eyes they all fall under the banner of a household employee.
There is one exception…if the worker earns less than $2100 in a calendar year (or $1000 in a quarter), you may classify them as an independent contractor (i.e. pay them with 1099s thus bypassing all these tax rules)…but beware, misclassifying your employee as an independent contractor and trying to avoid these taxes is illegal – something the IRS and state tax authorities are working hard together to crack down on.

What are ‘nanny’ taxes and how much are they?

A good budget estimate is about 10% – 12% of the employee’s gross earnings broken down as follows:

  • Social Security & Medicare taxes (FICA): Both the employer and employee pay a 7.65% share of FICA taxes (for a total of 15.3% that is always remitted by the employer).   This is why it is important for the family to withhold 7.65% from every employee paycheck…not doing so would mean that the family would end up paying for the employee’s share of FICA when it came to remittance time.
  • Federal & state unemployment insurance (FUTA and SUTA): The employer pays all federal unemployment taxes, and usually all of the state taxes as well (however we advise to check as some states require a small additional withholding from the employee).  A good estimate to budget for here is an additional 2 to 4%.

What can I do ahead of time to get ready?

  1. Get an EIN.  Household employers can’t use their SSN when filing taxes, you need to get a federal Employer Identification Number instead (do that online here at www.IRS.gov/EIN. ) When you receive it, use it to register with your state to get your State Tax ID also.
  2. Collect Form I-9 (Employment Eligibility Verification). Household employers must obtain this for every employee hired (it verifies their identity and employment eligibility).  It can be downloaded here and completed by your employee for your records.
  3. Complete W-10: Dependent Care Provider’s Identification and Certification. If you plan to claim the childcare tax credit (and why wouldn’t you!) you need to fill out this form here.

  4. Agree a system to record all hours and payroll.  It seems obvious but if you do this right – you are not only going to make tax filing a breeze for yourself, you’re also going to ensure you are paying your employee the right amount each week whilst protecting yourself.   Keep track of your employee’s gross pay, the FICA taxes being withheld (7.65%) and be especially observant to pay overtime when it is due (New York State for example rules that any hours over 44 in a week must be paid at 1.5x).  You have many options available to help you here – including our own time tracker and scheduler.  Whatever you choose – pick something that you and your homepair are comfortable with maintaining that will support your filings.

What to file and how to pay

  1. Provide your homepair with their W-2:  Enter gross wages, less FICA taxes withheld and send them a copy no later than January 31st.   You will need to also file a copy to Social Security along with Form W-3 (a reconciliation of all your employee’s W-2s, even if you only have one).  All of this can be done online using the SSA’s website at www.socialsecurity.gov/employer (instructions here and here).
  2. File Schedule H with your income tax return in April: This form summarizes your employee wages and calculates your tax liabilities (instructions for that are here) taking into account any payments you have already made.  Your state return will usually require a similar annual summary to be completed for the same purpose.
  3. Pay / remit your federal taxes: Most families recommend quarterly tax payments (using forms 1040ES) to avoid an underpayment penalty in April should the Schedule H tax liability be too large.  You can do all this online using the payment service on the IRS website here.
  4. Pay / remit your state taxes: State tax requirements vary (some only require them paid annually, others may request you pay them quarterly) – please check your local State government website for details.

What are the benefits of paying nanny taxes?

  1. Your homepair deserves them:  Paying them provides your employee with all the protections and benefits all other employees enjoy such as access to Social security, Medicare and unemployment benefits.  The verifiable income itself also builds a credit history so they can apply for a credit card or a loan.
  2. Tax breaks offset them: The taxes you end up paying are significantly – if not completely – offset by the tax breaks you have available (Flexible Spending Accounts and the Child and Dependent Care Credit).
  3. Peace of mind: You’re not only doing a good thing, for little personal cost, you are at risk of some severe penalties if you try to pay your employee under the table.  It’s really not worth the stress …as long as you keep a record of your gross wages and tax withholding, filing these taxes is actually relatively simple.  Even if you didn’t feel up to the task…there are many payroll services that can handle them for you, including your tax professional.

How much work will filing nanny taxes involve? 

The IRS estimates it takes about 5-6 hours to file and complete your Schedule H and W2 / W3 forms, add on some additional time needed to for state filings and this shouldn’t take you more than 8 hours in total.  If you use tax products such as TurboTax – you can cut that time down even further.  Many families simply pay their existing tax professional to cover at a small incremental cost, or will hire a nanny tax payroll service to handle it.

Whatever option you choose – the biggest time and cost saver for you will be the system you use to maintain a record of your employee hours and pay.  Get this right and not only will it ensure you pay and withhold the right amount of wages and taxes each week – the records effectively plug straight into these returns at year end.

* The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.

Information last updated 3/24/2019