People who hire household workers, like gardeners, caregivers, housekeepers, etc., will pay an employment tax called the nanny tax. The threshold for the 2023 tax year is $2,600, and $2,400 for all 2022 wages.
To meet this limit, the Medicare and Social Security share of the tax should be sent to Uncle Sam. Any worker that gets $1000 or more in a quarter must pay the federal unemployment tax.
When you hire someone to work in your home, such people are not considered independent contractors but employees. As a result, Social Security, Medicare, and unemployment taxes apply. This tax is not restricted to nannies but to people who work in another person's home.
Do You Need to Pay Nanny Taxes?
Suppose you employ someone as a worker in your home and are in charge of how, when, who, and where they work; such a person is classified as a household employee. Anyone classified as a household employer must pay the worker Medicare and social security taxes. This amounts to 7.65% of the wage paid – same for the employer as well, and you can decide to pay yourself or deduct it from their salaries.
In the same way, anyone who pays more than $1000 or more in a specific calendar quarter needs to pay the federal unemployment tax. This amounts to 6% of the wage and may reach $7000 in wages. There might be the need to also pay state unemployment taxes which amount to 5% at most in many states.
If your spouse or kid below 21 decides to work for you, you are exempted from paying Medicare or Social Security taxes. Also, anyone below age 18 does not need such.
Ensure Your Employee is Eligible
Anyone who will work for you needs a valid Social Security Number. Resident aliens and non-American citizens must be eligible to work as the Department of Homeland Security stipulates.
It might be a bad idea to assume your employee has a Social Security Number or is eligible to work.
When the employment arrangement begins, ensure you are on the same page with your worker. Your workers will need to account for four unique taxes:
Social security tax (6.2%)
Medicare tax (1.45%)
Federal Income tax
Local and state tax
You need not withhold federal and state income taxes unless you agree with your worker. Although, it is a good idea to withhold income taxes as your employee benefits as well. Also, you have good documentation of their employment, and there will be no surprises with the law. With this, they don't have to worry about paying a massive amount as income tax when the year ends.
Estimating Your Nanny Tax Amount
Assume someone lives in New York and pays a nanny $40 per hour for a 40 weekly work hour to care for a sick parent. Also, for this example, we assume you are filing as a single, and there is no second job.
Here is the employee’s portion of the tax, and she will owe this every pay period:
Federal income tax is $119.74
Social Security is $93.20
Medicare is $23.20
State Income tax is $61.76
The total tax payment is $297.90, and the net payment will be $1302.1 per week.
In addition to what your employee pays, the employer also pays the following:
Federal unemployment: $9.60
Social Security: $99.20
Medicare $23.20
State Unemployment tax: $65.60
This makes the entire tax responsibility $197.60; your total payment will be $1797.60. You can, however, bring this down via the employer's Child & Dependent Care Tax Credit or the Flexible Spending Account.
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