Posted by Tucker Accounting Services LLC

Nanny Taxes: A Complete Guide

Nanny Taxes: A Complete Guide

Most families are not tax professionals. So when the time comes to hire a nanny, especially if it's your first time, knowing all the details and IRS requirements and your status can be confusing and overwhelming. To make this process easier, we'll take a look at everything you need to know about payroll taxes or nanny taxes, as they're commonly referred to.

What are the nanny taxes?

A Nanny tax is a combination of federal and state tax requirements outlined in IRS 926 that families must administer when hiring a maid, such as a senior caregiver, nanny, or personal assistant. The costs include:

  • Withheld taxes from employees: Social Security and Medicare Taxes (FICA) and state and federal income taxes.

  • Taxes paid by the employer:  health insurance and social security taxes and federal and state unemployment insurance.

For the fiscal year 2021, nanny taxes come into play when a family pays a domestic worker $2,300 or more in a calendar year (or $ 1,000 or more in a quarter for insurance taxes unemployment).

Your obligations vary depending on where you live. Not all states have an income tax, while others require that additional taxes be withheld by your employee, paid by your employer, or both. 

What qualifies one as a household employee?

According to the IRS, a domestic worker is an employee if you control the work that is done and the way it is done. Usually, this means that the employee will come to your house on your terms and follow your rules. It doesn't matter if you work full or part-time or hired the worker through an online platform; they are still considered a taxable domestic worker if you pay more than $ 2,300 per calendar year. Families mistakenly classify their nanny as an independent contractor by providing a 1099 tax return form may be charged with tax evasion.

How to pay nanny taxes

There are four main actions that families should take care of:

Obtain Tax ID Numbers: Federal and state tax ID numbers are required to record your nanny's taxes. You can obtain the Federal Employer Identification Number (FEIN) from the IRS and use that number to obtain your state identification number from the relevant tax agency in your state.

Calculate and Track Salary: You need to accurately calculate the gross salary, deductions, and employer taxes for each pay period. 

Submit tax returns throughout the year: In general, you will be required to file state income tax returns quarterly. Some states require monthly or annual deposits, so check the details for your region to be sure. You also have to send 1040 estimated payments to the IRS four times a year.

Complete the year-end tax forms: You must provide your nanny with a W-2 form before the end of January of each year so that they can use it to complete their tax return.

The social security administration asks you to send form W-3 and copy A of form W-2. This lets them know that you have successfully withheld the FICA fee from your nanny and that you have paid the FICA fee throughout the year.

You must prepare Schedule H and submit it with your federal income tax return.

Your state may also require an annual reconciliation form summarizing the income taxes you withheld from your nanny.

What should be the contribution of household employees?

Before a nanny can start working for a family, they need to provide three things:

  • A completed federal W-4 and the appropriate state withholding tax form (if you live in a state income tax).

  • A completed Form I-9 with the appropriate identification documents.

  • A social security number or ITIN.

What are the advantages of paying nanny fees?

Families and nannies benefit from an adequate tax refund. Employers may be eligible for tax incentives to offset the cost of health care taxes and may be less concerned if the IRS or the state controls them. Nannies also gain this peace of mind; plus, it is easier to enjoy short and long term benefits, such as:

  • A verifiable work history is required to obtain auto and residential mortgages.

  • Reduction of health costs thanks to the subsidies provided by the law on accessible health.

  • Retirement income and Medicare retirement coverage.

  • Unemployment benefits if you lose your job through no fault of your own.

Filing Nanny Tax: How much work will it cost?

The IRS estimates that the average family can expect to spend between 50 – 55 hours a year to properly manage the nanny's tax process. This includes all of the tax requirements listed above and managing employee salaries, and responding to notifications sent by the IRS and state tax agencies.



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