Nanny taxes: A complete guide
Nanny tax requirements
The nanny tax is a combination of payroll taxes an employer must pay when they hire a household employee, such as a nanny. If you control your nanny's salary, hours, and duties and pay them $2,600 or more in a calendar year, you must pay nanny taxes, with few exceptions.
| Taxes | % of wages | Details |
|---|---|---|
| Social Security and Medicare taxes (FICA) | 15.3% | 7.65% paid by employer and 7.65% paid by employee |
| Federal Unemployment Tax (FUTA) | 0.6% net tax | Tax is 6.0% of FUTA wages, but a possible 5.4% credit reduction results in a 0.6% tax. |
| State Income Tax | Varies by state | Some states tax you on the income earned in that state. Tax rates vary by state. |
| Federal income tax withholding | Varies by filing status and earnings | Not required but can be withheld at the employee's request |
The IRS Publication 926, Household Employer's Tax Guide is a great resource for household employers to help you understand your tax obligations.
Nanny tax status
In almost all cases, ongoing nannies and other caregivers are considered household employees according to the IRS. As a household employer, you are required to pay state and federal taxes for your employees who earn more than $2,600 per year in wages.
Household workers
A household worker is any employee who performs services in or around your home, providing you dictate the work they do, how it is done, and when. For example, a nanny who is required to work a specific schedule and follow your directions for the care of the children is a household worker.
Not all people who work in your home are considered household employees, including:
Your spouse
Your children under the age of 21
Your parents, except under specific circumstances
An employee under age 18, unless performing household work is their principal occupation
Independent contractors, such as plumbers, electricians, and landscapers
Self-employed caregivers
A self-employed caregiver provides care for a child, elderly person, or disabled person in your home, but is not considered your employee. Self-employed caregivers are responsible for their own taxes, including self-employment tax, and do not receive benefits such as Social Security or Medicare.
To qualify as a self-employed caregiver, they must meet the following criteria:
They provide care in or around the home of the person they are caring for.
They set their own hours and rates of pay.
They provide care regularly, but not necessarily the same number of hours each week.
They provide their own tools and supplies.
They are responsible for their own taxes.
How to pay nanny taxes
Paying nanny taxes can seem overwhelming, but it is not that difficult if you stay organized. The steps for paying nanny taxes will vary depending on your location and the circumstances of your employment relationship with your nanny. However, these are the general steps:
Determine employment status –As mentioned before, if you set your nanny's pay, hours, and responsibilities, they are a household employee, not an independent contractor.
Obtain a Tax ID number – A Federal Employer Identification Number (FEIN) is available through the IRS website.
Gather employee information – Collect your nanny's name, address, Social Security Number (SSN), and work authorization documents if applicable.
Calculate your nanny's wages and withholding – Determine your nanny's wages and calculate the appropriate federal and state income tax withholdings, including Social Security and Medicare taxes (FICA).
Complete form W-4 – Have your nanny fill out the form that helps determine the correct amount of federal income tax to withhold from their wages.
Calculate and withhold FICA taxes – Calculate and withhold the proper taxes from your nanny's wages and pay them to the IRS each quarter by filing Form 941 with the IRS.
File Schedule H – Complete Schedule H (Household Employment Taxes) as part of your personal income tax return (Form 1040) to report the employment taxes for your nanny.
Pay Federal and State Taxes – Make estimated tax payments for both federal and state income taxes, if required. These payments are typically made quarterly using Form 1040-ES (Estimated Tax for Individuals) and the Electronic Federal Tax Payment System (EFTPS).
Prepare Form W-2 – By January 31st of the following year, provide your nanny with Form W-2, which reports their total wages and the taxes withheld. You'll also need to send Copy A of Form W-2 to the Social Security Administration or submit the information electronically via their Business Services Online portal.
File State taxes as needed – Research and comply with any additional state and local tax requirements, such as state income tax withholding and unemployment insurance contributions.
Keep Records – Maintain accurate records of your nanny's wages, tax withholdings, and any payments you make. These records will be important for tax reporting and potential audits.
If you are not comfortable handling the nanny tax process yourself, consider hiring a nanny payroll service to do it for you.
Nanny tax benefits
Paying taxes offers benefits to both you and your nanny, including:
Legal compliance – Paying nanny taxes ensures you comply with all applicable federal, state, and local laws. This can help you avoid penalties and fines and protect yourself from legal liability.
Tax benefits – Both employers and nannies may be eligible for tax breaks for paying nanny taxes. For employers, these breaks can include the Dependent Care Tax Credit and the Dependent Care Flexible Spending Account (FSA). For nannies, these benefits can include unemployment insurance and Affordable Care Act subsidies.
Financial security for nanny – Paying nanny taxes helps to ensure your nanny has a secure financial future. The taxes paid now will help fund Social Security and Medicare benefits, which they will be eligible for when they retire.
Better working relationship – Nannies who are paid legally are more likely to be happy and satisfied with their jobs, leading to a better working relationship between you and your nanny.
Peace of mind – Knowing you are paying your nanny taxes correctly can give you peace of mind, especially if you are ever audited by the IRS or your state taxing authority.
Nanny tax penalties
The penalties for not paying nanny tax can be severe, both for the employer and the nanny. To avoid these penalties, it is important to understand and comply with the requirements. Some of the key penalties for unpaid taxes include:
Civil penalties – The IRS can impose civil penalties of up to 100% of the unpaid taxes, plus interest. These penalties can be assessed even if the employer was not aware of the tax law requirements.
Criminal penalties – In some cases, failing to pay nanny tax can be considered tax evasion, which is a felony. If convicted, the employer could face fines of up to $250,000 and/or imprisonment for up to five years.
Damages to the nanny – If the nanny is denied unemployment benefits or social security benefits because the employer did not pay the required taxes, the employer could be liable for damages to the nanny.
Damages to the household – If the nanny is injured on the job and the employer does not have workers' compensation insurance, the employer could be liable for damages to the household.
Nanny taxes paid by the employer
If you are an employer who pays cash wages over $2,600 for the calendar year, your tax responsibilities include:
Social Security and Medicare Taxes – Withhold 7.65% from the employee's wages and pay the amount you withheld plus your equal share of 7.65% to the IRS.
Additional Medicare Tax – Withhold a 0.9% Additional Medicare Tax from wages you pay to an employee over $200,000 in a calendar year.
Federal Unemployment (FUTA) Tax–This tax pays unemployment compensation to workers who lose their jobs. The tax is 6.0% of your employee's FUTA wages, but a credit reduction of 5.4% against the FUTA tax makes for a net tax rate of 0.6%. See the Instructions for Schedule H (Form 1040).
State employment taxes – Contact your state unemployment tax agency to find out whether you are required to pay state unemployment tax for your household employee. Visit the U.S. Department of Labor website for a list of state unemployment tax agencies.
Federal Income Tax – You're not required to withhold federal income tax from wages you pay unless your employee asks you to withhold it and you agree. If you agree to withhold federal income tax, you are responsible for paying it to the IRS.
Nanny taxes paid by the employee
A nanny or caregiver also has a few tax responsibilities, depending on whether they are an independent contractor or household employee. Most nannies must pay the same taxes as they would for any regular job, including:
Social Security and Medicare Taxes – Your employer will withhold 6.2% of wages for Social Security tax and 1.45% of earnings for Medicare and pay it directly to the IRS.
Federal Income Tax – This percentage will vary depending on your filing status and the amount of your earnings.
State Income Tax – If you live in a state with an income tax, you are required to pay state income taxes, which depend on your filing status and the amount of your earnings.
Local Income Tax – Some cities and counties also have an income tax. As of 2023, there are about 100 localities in the US that have a local income tax, including New York City, Chicago, Philadelphia, and San Francisco.
Nanny tax FAQs
What is a nanny tax?
Nanny tax is a term used to describe the tax requirements that apply to household employers who hire someone to provide care for children or other dependents in their home. The nanny tax is a combination of payroll taxes withheld from a household employee's wages and the employment taxes paid by their employer.
Is a nanny tax deductible?
Yes, nanny tax can be deductible for some families. The Child and Dependent Care Tax Credit (CDCTC) is a tax credit that can be used to offset childcare costs, including nanny taxes. The amount of the credit you can claim depends on your income, your childcare expenses, and your tax filing status.
Are grandparents exempt from nanny tax?
A grandparent providing childcare for their grandchildren in your home is exempt from nanny taxes in most cases. You do not have to withhold FICA taxes on their income, and they do not have to pay FICA taxes because they are your parent. They do have to report their income to the IRS.
There are some exceptions to this grandparent exemption, so the best way to be sure of your tax obligations is to schedule an appointment with a tax consultant.
Getting help from a nanny tax specialist
There are a lot of rules to follow when it comes to paying your share of nanny taxes and many parents find it is worth the cost to hire a tax advisor to guide them through the process. Here are some suggestions to help you find the right tax consultant to help with your nanny tax responsibilities:
Look for a tax consultant who specializes in household employment taxes. You can find these consultants through the National Association of Enrolled Agents (NAEA) or the Society of Human Resource Management (SHRM).
Search online for tax advisors with outstanding reviews and experience handling nanny taxes in your state.
Ask about their availability, qualifications, experience, fees, and available services.
Questions to ask a tax consultant
Here are some questions to ask when interviewing tax consultants about your nanny tax obligations:
How much experience do you have with nanny taxes?
What are your fees?
What services do you offer?
How will you stay up to date on the latest tax laws?
Are you available to answer questions throughout the year?
Are you licensed and insured in my state?