Top nanny tax questions for “household employers” aka parents
New parents face a lot of surprises when they bring their child home, including a possible surprise from the IRS. If they hire a nanny, they may be considered household employers and could be responsible for paying and withholding nanny taxes such as Social Security, Medicare and unemployment taxes. They also may need to issue their nanny a W-2 and submit it to the federal government. Although new parents may not expect to have responsibilities as an employer added to their responsibilities as parents, understanding nanny tax rules will help them navigate their new roles.
When is a nanny a household employee?
Parents have a household employee if they hire a nanny and control what work is done and how it is done. Even if the parents found their nanny through an agency, they are the nanny’s employer if they have control over the work and pay the nanny directly. It likewise does not matter if the nanny is full-time or part-time or how often they pay the nanny.
Even if a nanny works for more than one family in a “nanny share,” both families typically control the work and how it is done. In that case, each family would be an employer and would pay nanny taxes on the wages it had agreed to pay.
When isn’t a nanny a household employee?
While most nannies are household employees, some could be self-employed. Self-employed child care providers provide their own supplies or equipment and offer their services to the public, perhaps for a number of different clients. These kinds of care providers are generally in-home day care providers and not household employees.
What employment taxes do household employers pay?
Like other employers, parents must pay certain taxes. If parents pay a nanny more than $2,100 wages in 2019, the nanny and the parents each pay 7.65 percent for Social Security and Medicare taxes. Instead of withholding the nanny’s share from the wages, parents may choose to pay the nanny’s share themselves. In either case, the parents are responsible for remitting both their share of the Social Security and Medicare taxes and the nanny’s.
If the parents pay the nanny wages of $1,000 or more in any calendar quarter, they also need to pay federal unemployment tax on the first $7,000 of wages. The federal unemployment tax rate is 6 percent, but many employers get a 5.4 percent credit against the tax. Parents may also need to pay state unemployment taxes.
What about grandparents or siblings who work as a paid nanny?
The taxpayer’s child under 21 or anyone under age 18 (unless they provide household services professionally) is not a household employee. Grandparents or older siblings are considered household employees if they meet the other requirements of a household employee. However, their wages are normally not subject to Social Security and Medicare taxes.
What income tax requirements do household employers face?
The parents do not have to withhold income tax from their nanny’s pay, but may choose to do so if the nanny asks them to. In that case, the nanny would need to complete a W-4 to allow the employer to calculate the correct withholding amount.
What does a household employer do with withheld taxes?
Household employers pay the withheld taxes along with their own income taxes due by April 15. Although they do not have to pay the taxes before the due date of their return, parents may want to increase their own income tax withholding or pay estimated taxes to cover the additional taxes due and avoid potential estimated tax underpayment penalties.
What are the tax benefits for parents with a nanny?
Parents who use a nanny for their child care needs may be eligible for the child care tax credit. The credit can be worth as much as 35 percent of $3,000 in qualifying expenses for one child or $6,000 for two or more children.
The parents also may be eligible to use their dependent care Flexible Spending Account (FSA) to pay their child care expenses. An employer-sponsored dependent care FSA allows the parent to save up to $5,000 pre-tax to use toward expenses. Any pre-tax FSA benefits are subtracted from expenses used for the child care credit. A tax professional can help parents maximize their child care tax benefits.
What nanny tax forms do household employers need and where do they submit them?
Parents will need to file Schedule H with their own federal income tax return which reports Social Security, Medicare, unemployment tax and any income tax withheld from their nanny’s wages.
They will also need to issue a W-2 to their nanny by the end of January and submit a copy, along with Form W-3, to the Social Security Administration by the end of January.
What about state taxes?
Parents aren’t done yet. The questions begin again when it comes to state taxes, as each state has different requirements and processes. Parents can check with their state department of revenue for information or consult a tax professional for assistance.
New parents have a lot to look forward to. For some it may include becoming an employer with tax responsibilities they didn’t anticipate. But by learning about nanny taxes and planning for their new responsibilities – and getting help when they need it – parents will be able to take on both of their new roles with confidence.