Nanny Tax: Paying Babysitters And Other Household Employees

May 29, 2012 : Teresa L. Clark

Having help around the house over the summer can lighten your load, but you need to understand your possible tax responsibilities for paying the babysitter or the person who mows your lawn. Discussion on this topic, which is often called “the nanny tax,” generally focuses on how many taxpayers ignore these responsibilities and subsequently engage in what the IRS defines as “tax evasion.”

Little reminder: Any money earned, no matter where or how, should be reported to the IRS as income, and of course this includes cash. In some instances, those who have household employees might be responsible for withholding taxes, depending on the specific circumstances. According to the IRS, household employees include “housekeepers, maids, babysitters, gardeners and others who work in or around your private residence…”

There are three basic areas of consideration when determining whether it is your responsibility to withhold taxes on the money you pay as a matter of running your household. These areas are influence on work being done, relationship to the person doing the work and the amount of money paid out, as outlined in the following:

  • Influence on work– First determine whether the person doing the work for you is a household employee or an independent contractor by determining which of these two scenarios best describes your situation
    • Individuals you pay for various household work or services, such as people you call in to make repairs, are generally either independent contractors or the employee of someone else, and you don’t have influence and control on how they perform their jobs OR
    • As an employer, you have influence and control on how the employee performs the work
      • If you determine the individual is your employee, then your relationship with the employee and the amount you pay the employee all are taken into account when determining if taxes must be deducted from wages
      • Each employee should complete Form I-9 to verify eligibility for employment and you should also make sure you have your employees’ Social Security numbers
  • Relationship– You do not have to withhold taxes if the person you are paying is any of the following
    • Your spouse
    • Your child, if under 21
    • Your parent, if payment is being made in exchange for care given to your child who is either under 18 or needs care for at least four consecutive weeks in a quarter due to a physical or mental condition
    • Anyone under 18
  • Amount– You must withhold Social Security and Medicare taxes if you paid your employee at least $1,800 annually (2012 threshold)
    • You’re not required to withhold federal income tax, but you may do so if your employee gives you a completed W-4 requesting these taxes be withheld
    • You’re required to pay federal unemployment taxes if the total wages paid to all your household employees is $1,000 or more in a quarter
      • Many states also have unemployment tax requirements.

If you determine you have a household payroll, you must report the income paid on your tax return. Do this by submitting Schedule H, which calculates the federal employment taxes on those wages. Also, you should file Form W-2 with the IRS for each employee and give each employee a copy.

Whether your household employees are seasonal or work for you year-round, having this extra help could result in needing the assistance of financial professionals. Depending on the number of people you employ, it may be beneficial to seek the advice of a professional bookkeeper. And, as are many tax laws, this is a complex issue that could make it beneficial for you to consult a tax professional.

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Teresa L. Clark

Teresa L. Clark

Contributor

Teresa L. Clark came to H&R Block in January 2010 after working as a civil servant for more than 13 years. Since that first tax season she has written blog posts and talking points, edited content of all shapes and sizes, facilitated media interviews for the experts in The Tax Institute at H&R Block and supported the DIY team. Clark has a master's degree in integrated marketing communications from the University of Kansas and is a member of the Honor Society of Phi Kappa Phi.