It is no surprise that paying someone to watch your kids or clean your property makes you an employer, and you have to do the employer donation. Those hired to do these jobs are considered employees except in some situations. The employer and the employee owe employment taxes to the IRS, which they call nanny taxes. However, the nanny has to qualify under the tax codes. Nanny taxes can reach up to 10% or more of the agreed wages for their services. But a different arrangement may reduce the expenses incurred by hiring a housekeeper or child caregiver.
Essentially, a nanny tax is a tax portion an employer pays to the IRS for having a household employee and remitting wages above the fixed standard. As of 2021, employers giving wages of $2,300 or more to their employees, Medicare or social security, are subject to a 15.3% tax rate; the employer and the employee divide the percentage and pay half (7.65%) each to the IRS. But employers paying about $1,000 or more per quarter for each employee are to pay a 6% unemployment tax which amounts to $7,000 annually.
The IRS has simple guidelines that place a nanny as an employee. If you have a nanny, you tell what happens as the job duties make the nanny an employee. Regardless of the work location and how you pay them, they are household employees when you or the workers dictate what and how to perform the job. However, if you hire a nanny from an agency that dictates what to do and how to do it, such disqualifies the nanny as an employee. For example, you cannot consider a cleaner that chooses to work on her terms with her tools to be a household employee, especially if she has other houses to clean. The cleaner is considered an independent contractor in this case.
However, if you have a household nanny instead of an independent contractor, there are still means to exempt paying nanny tax, such as
If the nanny is your spouse
If your child is under 21
If it’s a minor under 18 years, they are not the service’s principal receiver and not a student.
Another way is that you don’t have to pay taxes for your parents, although you must consider these two conditions.
Your parent must be providing care to a minor under 18 years or a child with a mental or physical issue that affects the person's self-care for at least four weeks in the quarter they need care, and
You are divorced, your spouse is dead, or you live with a disabled partner unable to care for a child for at least four weeks in the quarter.
These conditions are the possible ways to exempt yourself from paying nanny tax.
Form I-9: the form is for Employment Eligibility Verification which the employee fills out and keeps for three years even after the employee is gone.
Form W-4: this form is for Employee’s Withholding Allowance Certificate, which is used to withhold federal income for employees. The forms predict how much you can withhold and what you’ll receive if you don’t remit taxes.
Form W-2: The Wage and Tax Statements form is used to show the employee how much money goes to Social Security, Medicare, and FUTA taxes and their gross wages.
Form W-3: The Transmittal of Wage and Tax Statements form is attached to the SSA and filed with the W-2 form. The form is also sent to the IRS for a single employee.
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