Ordinarily, a nanny you hire to take care of your children in your home will be your employee, under your direction and control. The payroll tax rules you'll need to follow depend on how much you pay the nanny each year.
What Taxes Must Be Paid?
The rules differ depending on the type of tax involved: FICA taxes (Social Security and Medicare taxes), FUTA taxes (Federal unemployment taxes), or income taxes.
If you pay a nanny employee who is over 18 years of age more than a threshold amount in cash wages in any year, you must withhold FICA (Social Security and Medicare) taxes from the nanny's earnings and make a matching contribution. Currently, the employer and employee must each pay an amount equal to 7.65% of the employee’s wages. The threshold amount is adjusted annually to account for inflation. For 2013, it was $1,800. To find out the amount for subsequent years, refer to IRS Publication 926, Household Employer’s Tax Guide. (You can get a copy from the IRS website.)
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 FUTA (federal unemployment) 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.
Most employers are required to withhold income taxes from their employees' pay and remit that money to the IRS. However, you don’t have to withhold federal income taxes from a nanny employee’s wages unless the employee requests it and you, the employer, 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 workers 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 employee nanny's share of FICA taxes and paying your own. Withholding means you deduct the taxes due from the worker’s pay and keep that amount 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. Instead of withholding the employee’s share of these taxes, you can pay them from your own funds. Obviously, if you do this, you should reduce the employee’s compensation to make up for the tax payments you’re making on the employee’s behalf.
Federal unemployment or FUTA taxes work differently. You cannot withhold FUTA taxes from an employee’s wages. You must pay them yourself.
You can save yourself time and hassle by hiring a payroll tax service to withhold and pay these taxes for you.
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 household employee. 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 hire a nanny or other household employee, the IRS requires you to obtain a federal employer identification number or EIN. An EIN is a nine-digit number the IRS assigns to employers for tax filing and reporting purposes. EINs are free and easy to obtain. Use your EIN on all your employment tax returns, employment tax checks, and other employer-related documents you send the IRS.
The fastest and easiest way to get an EIN is to apply directly at the IRS website. The IRS has an online EIN Assistant tool you can use. If you are not comfortable sending information via the Internet, you can download IRS Form SS-4, Application for Employer Identification Number and send it by postal mail. Alternatively, you can receive your EIN by calling the IRS at 800-829-4933 during 7:00 a.m. to 10:00 p.m. local time (Pacific time for Alaska and Hawaii).