What Is a Nanny Tax?
A nanny tax is a federal tax obligation for people who employ household employees and pay wages over a specified threshold. As of 2021, employers who pay cash wages of $2,300 or more per employee must withhold social security and Medicare taxes at a combined rate of 15.3%, with employers and employees each contributing 7.65%. Additionally, if an employer pays cash wages of $1,000 or more in any quarter, a 6% unemployment tax is due on annual wages up to $7,000.
Empower Your Household: Understanding the Nanny Tax
Household employees—such as babysitters, nannies, butlers, and cooks—are under the employer’s control regarding the job performed and how it is done. Consequently, the IRS mandates that these workers are classified as household employees rather than independent contractors. This classification requires employers to pay Social Security, Medicare, and federal and state unemployment taxes on the wages paid to these employees, as outlined in IRS Publication 926.
For example, if you pay an adult babysitter $50 every weekend, amounting to $2,600 annually (52 weekends), you must pay the nanny tax. This rule does not apply if the babysitter is your parent or spouse, or if the babysitter is under 18 and not primarily engaged in household employment. Hiring through an agency places the tax responsibility on the agency rather than you.
The nanny tax ensures that household employees receive essential benefits like Social Security, Medicare, and unemployment protections. These contributions provide employees with verifiable income and a legal work history, beneficial for securing credit cards, loans, or mortgages. Meanwhile, employers can benefit from tax savings through Flexible Spending Accounts and the Child and Dependent Care Credit.
Key Insights to Motivate Responsible Employment
- A nanny tax is a federally mandated tax for employing household workers who earn wages over a given threshold.
- The IRS classifies ongoing household helpers as household employees, not as independent contractors.
- Paying the nanny tax qualifies employees for benefits such as Social Security, Medicare, and unemployment insurance.
- Employers and employees jointly pay Social Security and Medicare taxes, with each contributing 7.65%.
Compete Like a Pro: Master Nanny Tax Requirements
Employers with household help must register for an employer identification number and fulfill specific tax reporting obligations. Neglecting these duties can result in penalties and accusations of tax evasion. In 2021, the combined withholding rate for Social Security and Medicare taxes is 7.65%, split equally between employer and employee.
Navigating nanny tax compliance can be daunting, but numerous nanny payroll services are available to ease the process. These services can manage everything from withholding taxes to filing the necessary paperwork, ensuring both compliance and peace of mind.
Related Terms: household employee, nanny payroll services, Flexible Spending Account, Child and Dependent Care Credit.
References
- Internal Revenue Service. “Publication 926: Household Employer’s Tax Guide”, Page 5.
- Internal Revenue Service. “Publication 926: Household Employer’s Tax Guide”, Page 3.
- Internal Revenue Service. “Publication 926: Household Employer’s Tax Guide”, Pages 4-5.
- Internal Revenue Service. “Topic No. 756 Employment Taxes for Household Employees”.
- Internal Revenue Service. “Publication 926: Household Employer’s Tax Guide”, Page 4.
- Internal Revenue Service. “IRS: Plan now to use Health Flexible Spending Arrangements in 2019”.
- Internal Revenue Service. “Topic No. 602 Child and Dependent Care Credit”.
- Internal revenue Service. “Employer and Employee Responsibilities - Employment Tax Enforcement”.
- Internal Revenue Service. “Understanding Employee vs. Contractor Designation”.
- Internal Revenue Service. “Publication 926: Household Employer’s Tax Guide”, Page 4-5.
