Nanny Employer Taxes
It’s easy to understand that traditional employers — corporations with established payrolls — must collect and pay payroll taxes. Many households aren’t aware that once they hire a nanny, or any other household worker, they’re likely to be an employer just like a factory owner or a shopkeeper, and must handle employers’ taxes on the wages they pay. Because it’s a misunderstood area of tax law, it’s easy to make potentially costly tax mistakes when you employ a nanny.
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Who Qualifies
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Most households who pay for childcare don’t qualify to pay taxes as an employer. Only households who pay more than $1,700 to a caregiver in a year must pay taxes as an employer on a nanny’s earnings, and only if that money isn’t paid to a parent, spouse or another of your children younger than 21. Wages paid to nannies and babysitters who are 18 years old or younger who aren’t principally employed as a babysitter — such as your 14-year-old neighbor — also don’t qualify for nanny taxes. If you drop your child off at a caregiver’s location, rather than having her provide care in your house, the Internal Revenue Service doesn’t consider you an employer, so you’re free from the tax burden in that situation as well.
FICA Taxes
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The IRS requires anyone who paid an in-home babysitter or nanny more than $1,700 in a year in the 2010 tax year to pay Social Security and Medicare taxes on those earnings. Employers and workers must pay a total of 12.4 percent of all wages to Social Security taxes and an additional 2.9 percent for Medicare. You may opt to pay the entire 15.3 percent of your nanny’s FICA taxes out of your own pocket, or, as with traditional employers, split the tax burden between yourself and withholding from your nanny’s paycheck. By law, you can’t make your nanny pay more than 50 percent of FICA taxes due.
Federal Unemployment Taxes
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If you paid your nanny $1,000 or more in any quarter, you also owe Federal Unemployment Taxes on her wages. The IRS requires employers to pay this tax directly, and you may not deduct it from your nanny’s paycheck. You must pay Federal Unemployment Taxes — also known as FUTA — at a rate of 6.2 percent for the 2010 on the first $7,000 of wages you pay. Wages that exceed the $7,000 threshold aren’t taxable for FUTA purposes, so take care not to overpay those taxes.
Federal Income Taxes
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Employers of household workers enjoy one benefit that traditional employers don’t: You don’t have to collect estimated income tax payments from your nanny’s wages. Although you may provide that service while you collect FICA and FUTA taxes — you’ll need to collect a W-2 from your nanny to collect those wages — you may leave the responsibility of individual income taxes up to your nanny.
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