What is a nanny tax and how does it affect me? (2023)

If you hire a babysitter, prepare for a big reveal: You could be considered a domestic employer in the eyes of the IRS. What that means is that you are responsible for paying and withholding what is commonly called a "nanny tax," which covers federal Social Security, Medicare, and unemployment taxes.

What is a nanny tax and how does it affect me? (1)

Essentially, it is the federal income tax that families pay for household employees who earn a certain amount of money.

Understanding nanny tax rules is essential for both the employer and the nanny. Read on as we break down what you need to know and do from a tax perspective.

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Why worry about the nanny tax?

Why worry about the nanny tax? Benefits for all in domestic work

Believe it or not, it is in both parties' favor to report nanny taxes:

Oemployeebenefits of having a registered job. Whether you are applying for a loan, want to buy a house, rent a car, rent an apartment or get a new credit card, having a legitimate job on file is crucial. Additionally, the employee can access long-term benefits such as unemployment insurance, Social Security income, Medicare, and even affordable subsidized benefits.health plancosts through the Affordable Care Act.
Odomestic employerIt also benefits from a tax point of view. Because you are paying for child care, you are eligible for theChild Care Tax Credit, which is worth up to 35% of $3,000 in qualified expenses for one child and $6,000 for two or more children. In most cases, you can also use yourFlexible Spending Accounts (FSAs)to cover childcare expenses associated with domestic service. Generally, paying families can use up to $5,000 in pre-tax dollars for this expense.

What is a domestic employee?

Calling your nanny a domestic worker or even an employee may seem too formal. But in the eyes of the Federal Revenue there is a technical definition and not all nannies are considered domestic employees. Here's a summary:

autonomous caregivers

These caregivers offer their services to the public and often have many families in their care. They generally provide home care instead of working from home. If they come to your house, they bring their own supplies and merchandise, and are responsible for sorting them when they work.

domestic workers

The IRS definition states that you, the employer, dictate what work is to be done, how it is to be done, and when. you run and pay them more than $2,400 per calendar year, they are considered domestic employees regardless of whether they work part-time or full-time. What else affects who qualifies? The age and family relationship of the caregiver may affect the nanny's tax eligibility. (That's because family members and those under the age of 18 do not qualify as domestic employees.)

What are the nanny's tax responsibilities?

Nannies have to take on some tax responsibilities as part of their domestic employment, but it will vary depending on their official tax status.

As noted above, a nanny or caregiver can be:

An independent contractor (these nannies are considered self-employed versus employed)
or domestic worker

What Independent Contractors Should Do

If you do not meet the definition of a domestic worker, you are an independent contractor. In that case you will get 1099 and possibly1099-Ks(if paid digitally) throughout the year. As an independent contractor, you are responsible for payingself-employment taxes. To keep up with the required taxes, many contractors payestimated taxesthroughout the year. learn more abouttaxes for independent contractors.

What housekeepers should do

Nannies must complete different tax forms than independent contractors, many of which must be completed before beginning work.

Provide a completed Form I-9 to your domestic employer to ensure you are eligible to work in the US.
provide a paddingFormulario W-4and state income tax withholding forms. Accurately fill in your name, address, and Social Security orINto your domestic employer. (Resource: Here it ishow to fill out a w-4 form.)

Main employer: What are the family tax responsibilities to pay the nanny tax?

Withholding tax.As a domestic employer, you will deduct federal and state taxes, FICA, and unemployment taxes from every paycheck.
FICA taxes.As a domestic employer, you are responsible for paying your share and the nanny's share of Social Security and Medicare taxes (7.65%). You can calculate nanny taxes by taking 15.3% of the employee's gross salary. This covers the domestic worker's portion of Medicare and Social Security payments. Families who paid professional household workers must pay their federal taxes by April 15. You have the option to split payments as an independent contractor would, paying estimated taxes each quarter to cover additional taxes and avoid underpayment penalties. Or change your family's federal income tax withholding to account for the additional taxes.
Unemployment taxes.As a domestic employer, you must also pay federal unemployment tax on the first $7,000 of wages. The federal unemployment tax rate is 6%, but many employers get a 5.4% credit against the tax. Parents may also have to pay state unemployment taxes. (Check with your state department of revenue for this amount.) Form W-2 with the IRS for each employee and give a copy to each employee. At the same time, submit Form W-3 to the Social Security Administration.

So now that you know the basics of nanny tax, it's time to share details on how to pay nanny tax and other associated tasks.

Request a tax identification number:As an employer, you will need a Federal Employer Identification Number (FEIN) to file with the IRS and state tax agency. Fortunately, signing up is pretty straightforward: all you have to do is get your number from IRS.gov. (Think of it like a Social Security number for an employer.)
Give your babysitter a W-4:Before they start working for you, give your babysitter a W-4 form to fill out. This form corresponds to the W-2, a wage statement. The W-2 is one of the most common to file, and for a reason. Notify the appropriate agencies that you are withholding FICA tax for her nanny and that she will submit FICA tax payments during the tax year.
Run Payroll:Accurately determine your domestic worker's gross wages, then subtract the applicable taxes withheld for each pay period.
Stay on top of taxes all year long:Depending on which state you reside in, you may be required to file state taxes on a monthly, quarterly, or yearly basis. In addition, you will need to file federal taxes, including: Social Security and Medicare taxes, federal unemployment taxes, and federal income tax withholding.
Complete the annual tax forms:Prepare and file a Schedule H to calculate federal employment taxes with your personal federal income tax return. Your state may require a separate document summarizing your nanny's withholdings. In addition, you must present your babysitterFormulario W-2with the IRS for each employee and give a copy to each employee. At the same time, submit Form W-3 to the Social Security Administration.

What happens if you don't pay nanny taxes?

If your family has what the IRS considers a domestic servant and you don't withhold federal income tax (commonly known as paying someone under the table), you could incur a tax penalty and have to pay back taxes. (for Medicare, Social Security, and unemployment taxes). In the worst case, the domestic employer would be accused of tax evasion.

While this is highly unlikely, be sure to get professional tax advice. And if you're a babysitter or housekeeper, be proactive! Tell your employing family that you want to withhold federal and state income tax on your earnings.

Nannies and Families: Get Help Filing Your Taxes from H&R Block

With the many tax laws associated with nanny taxes, it may be to your advantage to consult atax professionalto meet your tax obligations. If you're still wondering how to pay your nanny taxes as an employee or employer, H&R Block can help. Learn about the manyways to present.