Do you pay someone to watch your child or clean your home? You may be surprised to learn that the IRS could consider that person to be your employee. And as an employer, you’ll be responsible for following federal tax requirements, as well as paying state and local taxes, where applicable. These “nanny taxes” may seem a bit confusing at first, but don’t feel overwhelmed. Our quick guide will help you handle the ins and outs of employment taxes like a true boss.
What are Nanny Taxes?
Nanny taxes are essentially payroll taxes that must be paid by anyone who hires a household employee who earns $2,300 (2021 tax year) or more in a calendar year. Per IRS Publication 926, nanny taxes include the following:
- Taxes Withheld From the Employee: Social Security and Medicare taxes (For 2021, FICA taxes are 7.65%).
- Taxes Paid by the Employer: Social Security (6.2%) and Medicare taxes (1.45%), as well as federal unemployment taxes (FUTA). Please note that you will be responsible for the full 15.3% in FICA taxes, if you don’t withhold any from your employee.
Federal unemployment taxes must be paid on the first $7,000 in wages for any household employee who earns $1,000 or more per calendar quarter. The tax is 6%, but you may receive up to 5.4% back in the form of a tax credit if you also pay state unemployment taxes. The state taxes must be paid by April 18, 2022, to get the full credit. You are not, however, required to withhold federal income taxes unless the employee requests that you do so, and you agree to it.
Who is Considered a Household Employee?
Although you may hire people to perform work around your home from time to time, the IRS has very specific rules regarding who is a household employee for tax purposes. In general, a worker will be considered your employee if:
- You can control the work being done, and;
- You can control how the work is done.
It does not matter if the work is part-time or full-time, or how the worker is paid, but the work must be provided at your home. For example, a yard worker who is required to use your tools, and can only work at the time you specify, would be classified as a household employee. If, however, that yard worker provided their own tools or set their own schedule, they would be considered an independent contractor (self-employed) and not your employee. Other examples of potential household employees may include cooks, drivers, babysitters, maids, private nurses, and heath aides.
Requirements for Employers
As an employer, the first thing you will need to do is apply for an employer identification number (EIN) from the IRS, and obtain a state employer identification number. You will need these numbers in order to report your nanny taxes. Next, you will need to apply for an unemployment insurance account number from your state tax authority.
There are also several forms that you should complete when you hire a household employee, as well as others you will need for your tax filing requirements.
Forms For Newly Hired Household Employees
- Form I-9, Employment Eligibility Verification: As an employer, you are responsible for verifying that your household employees are eligible to work in the United States. As such, you’ll need them to complete Form I-9 and provide the necessary documents for you to complete the employer section. Although you are not required to submit this form to the IRS, we strongly encourage you to keep it on file. Should a question ever arise about your employee’s legal right to work in the U.S., you’ll be covered.
- New Hire Report: Each state requires employers to submit a New Hire Report, which must be sent within 7 to 20 days (varies by state) after the employee’s hire date. The purpose of the report is to prevent fraudulent unemployment and worker’s compensation payments. States also use the data to establish or enforce child support orders, and prevent unlawful receipt of public assistance, such as food stamps and Medicaid payments. Employers who do not submit the report may face fines for non-compliance.
- Form W-4, Employee’s Withholding Certificate: You are not required to withhold federal income taxes from your employee’s wages. If they request that you do, however, and you agree, they will need to complete the revised Form W-4. The form determines how much you should withhold from your employee’s paycheck.
Federal Tax Filing Forms
- Form W-2, Wage and Tax Statement: You will need to prepare Form W-2 for each household employee. This form shows wages earned for the previous year, as well as any income taxes, Social Security and Medicare taxes that were withheld. The deadline to file this form is February 1, regardless if you file electronically or by paper. It is also your responsibility to give your employee Copy B and C, as well as Copy 2, no later than February 1. Retain Copy D for your records.
- Form W-3, Transmittal of Wage and Tax Statements: Form W-3 should be sent to the Social Security Administration along with Copy A of Form W-2. The deadline to submit the forms is February 1 and can be done online. You must complete a W-3 even if you only have one W-2 to file.
- Schedule H, Household Employment Taxes: You must file Schedule H, if any of the following are true: you paid any household employee $2,300 or more (2021), you withheld federal income tax from an employee’s wages, or you paid a total of $1,000 or more to an employee in any calendar quarter (2020 or 2021). The form should be filed with your Form 1040. It may also be filed on its own, if you aren’t required to file a federal tax return. The deadline to file is April 18.
You should also be making quarterly estimated tax payments, as well as filing any required state taxes. Since many states have different requirements (monthly, quarterly or annual payments), we encourage you to visit Care.com to get a quick overview of what may be required for your specific state. You can also visit your state’s Department of Revenue website to learn more about your tax responsibilities as a household employer.
Consequences of Not Paying Nanny Taxes
Dealing with the paperwork and tax filing requirements for a household employee may seem like a hassle. Avoiding nanny taxes, however, can lead to a variety of problems with the IRS and your state. If you fail to withhold state unemployment taxes, and the state finds out, you will have to pay all back taxes, as well as any penalties and interest. The state will also notify the IRS, which could trigger an audit.
Failure to pay Social Security and Medicare taxes, or neglecting to provide a W-2 to your employee, can also lead to fines and penalties. In some cases, you may even be charged with tax evasion, which is a felony. If found guilty, you could face up to five years in prison and/or as much as $250,000 in fines. Keep in mind that there is no statute of limitations for failure to pay nanny taxes since these fall under the category of employment taxes.
If you’re a new household employer and need help, contact Tax Defense Network. We can help you complete the necessary forms, determine your tax liability, and keep you on track. For those who haven’t been keeping up with their nanny taxes, we can help you, too! To learn more, schedule a free, no-obligation consultation today!