Do you need to withhold and pay taxes to the IRS when you hire a nanny to take care of your children. Like most tax questions, the answer is "it depends."
Nannies Hired Through Agencies
A nanny you hire through a placement agency to come to your home to care for your child is not your employee if the agency sets and collects the fee, pays the sitter, and controls the terms of work—for example, provides the sitter with rules of conduct and requires regular performance reports. The agency is the sitter’s employer, not you. You don't have to worry about paying any payroll taxes for the nanny. This is one of the benefits of using an agency--a benefit the agency charges you for.
Nannies Hired Directly
If your nanny works for you directly, and not through an agency, you will ordinarily be considered her or his employer for tax purposes. You may have to pay and withhold payroll taxes for the nanny. It all depends on how much the nanny is paid.
Social Security and Medicare Taxes
Social Security and Medicare taxes, also called FICA taxes, consist of a 12.4% Social Security tax up to an annual wage ceiling ($117,000 in 2014) and a 2.9% Medicare tax on all employee wages for a total tax of 15.3%. Half this tax is paid by the employer and the other half by the employee. The employer must withhold its portion of the tax and pay it to the IRS. Starting in 2013, an additional .9% Medicare tax is withheld on any wages in excess of $200,000.
You must pay FICA taxes for a nanny who is over 18 years of age if he or she is paid over a threshold amount during the year. The amount is adjusted annually to account for inflation. For 2014, it was $1,900. To find out the amount for subsequent years, refer to IRS Publication 926, Household Employer’s Tax Guide.
You don’t have to pay FICA taxes for nannies or household employees who were under 18 any time during the calendar year and for whom household service is not a primary occupation. But you must pay FICA if domestic service is the teenager’s principal employment.
If the amount you pay is under the threshold, you need not file federal tax forms for the nanny. But nannies and other household employees who earn less than $1,000 still must pay their own income, FICA, and FUTA taxes unless their overall income is so low that they’re not required to file a tax return.
Federal Unemployment Taxes
If you pay a nanny $1,000 or more in cash wages during any calendar quarter—that is, any three-month period—you must also pay federal unemployment taxes--also called FUTA taxes. The rate varies from state to state depending on the amount of state unemployment taxes, but it is usually 0.6% of the first $7,000 of annual wages paid to an employee, or $42 per year.
Income Tax Withholding
You don’t have to withhold federal income taxes from a nanny's wages unless the employee requests it and you agree. The same rule is followed under most state income tax laws.
It’s unlikely that a nanny would make such a request because most people prefer not to have tax withheld from their paychecks. But if a nanny does ask you to withhold income tax, it’s probably not in your interest to agree; it will only create extra bookkeeping headaches for you.
Paying FICA and FUTA taxes
You are responsible for withholding your nanny's share of FICA taxes and paying your own. Withholding means you deduct the taxes due from the worker’s pay and keep it in your bank account. IRS Publication 926, Household Employer’s Tax Guide, contains a table showing you how much you should withhold from the wages you pay a household employee.
When you file your federal income tax return, you must include as income all the FICA and FUTA taxes due on the wages you paid your nanny. The amount you owe on this additional “income” is due to the IRS with your tax return by April 15. You report your household employment taxes on IRS Schedule H, which you attach to your Form 1040.If you have several household employees or pay them a lot, you could have substantial extra taxes due when you file your tax return. You can avoid this by paying estimated taxes during the year to the IRS to cover the amount of employment taxes due. Alternatively, if you are employed, you can have your employer increase the amount of federal tax it withholds from your paychecks.
If you don’t pay estimated tax or have enough tax withheld from your paychecks, you may have to pay the IRS an estimated tax penalty. Generally, you’ll have to pay a penalty if the amount you have withheld from your paychecks or pay as estimated tax during the year is less than 90% of your total tax due for the current year.
If you own a business as a sole proprietor or if your home is on a farm and you have business or farm employees, you can choose between two ways of paying your household employment taxes. You can pay them with your federal income tax as described above, or you can include them with your federal employment tax deposits or other payments for your business or farm employees. You may not deduct wages and employment taxes paid to your household employees on your Schedule C or F; those deductions apply only to wages and taxes paid for business and farm employees.
If you withhold or pay FICA taxes or withhold federal income tax, you must file IRS Form W-2 after the end of the year. To complete Form W-2, you will need both an employer identification number and your nanny's Social Security number.
If you do not have an Employer Identification Number (EIN), you can get one immediately over the Internet or by telephone, in four business days by fax, or in about four weeks if you apply by mail. See IRS Form SS-4, Application for Employer Identification Number.