02 Mar Nanny Taxes
By law, a Nanny is considered an employee and not an independent contractor. The employer controls the work that needs to be done and Nanny’s schedule while dictating how the work will be performed.
Getting Nanny taxes and pay right can be complicated. The IRS estimates that it can take a household employer 60 hours a year just to comply with all the tax, wage, and labor laws surrounding domestic employment.
Skipping your Nanny tax obligations and paying “under the table” shouldn’t be an option. It’s easy to get caught and you’ll wind up paying much more in fines, penalties, and back taxes.
Here are some steps to help you prepare your Nanny taxes.
January 31, 2020 is the deadline to provide your household employee(s) with their W-2. Now is the time to start preparing your nanny taxes.
If you’ve been tracking hours worked, withholding taxes each pay period, and remitting quarterly, congratulations! You’re in good shape this tax season. If not, it isn’t too late. It’ll just take a little more work on your part to catch up and learn how to pay nanny taxes yourself.
1. Verify If You Owe Nanny Taxes
If you paid your nanny $2,100 or more in 2019, then you and your employee owe FICA taxes. This is the contribution to your employee’s Social Security and Medicare accounts. If you paid a nanny $1,000 or more in any calendar quarter, you owe federal and state unemployment taxes.
2. Confirm Your Employee’s Information
To save headaches down the road, make sure you have your employee’s correct legal name, Social Security number, and address.
3. Review Hours Worked
If you’ve kept accurate timesheets and pay stubs, this is an easy step to complete. Just confirm that all hours worked have been paid correctly. As a reminder, nannies are to be paid at least minimum wage, which is the highest of the federal, state or local rates. They also receive overtime pay of time-and-half for hours worked over 40 in a week.
4. Calculate Employee Tax Withholding
Your employee owes 7.65 percent of their cash wages in FICA taxes (6.2 percent for Social Security and 1.45 percent for Medicare). You’ll need this for their W-2 so your employee can file their personal tax return. Hopefully, you’ve been withholding and remitting these taxes on your employee’s behalf. If not, they will owe their entire tax obligation when they file their return. This can be thousands of dollars that they may not be able to pay all at once.
Your employee may also owe federal and state (if applicable) income taxes. You’re not required to withhold income taxes from their pay. Again, it’s helpful for your nanny to have this taken out of their pay on a regular basis rather than possibly owing a large sum by the April 15 tax filing deadline. Use a nanny tax calculator to get a clearer picture.
5. Determine Your Tax Obligation
You’ll owe 7.65 percent of what you paid your nanny in FICA taxes as well as six percent on the first $7,000 of gross wages in federal unemployment taxes. You may also owe state unemployment taxes. When you file your personal tax return, this entire amount will be due. Unless, of course, you’ve been paying quarterly.
6. Provide Your Nanny With Their W-2
Complete Form W-2, give it to your nanny by January 31. Form W-2 details the wages they earned for the year plus any taxes that have been withheld. You’ll also need to file Copy A of Form W-2 and Form W-3 with the Social Security Administration by January 31.
7. Complete Schedule H
Fill out Schedule H and attach it to your personal tax return. This is where you’ll report wages paid to your employee as well as tax withholdings including Social Security, Medicare, and federal and state unemployment taxes.
You may be able to take a tax credit for your nanny’s pay as a child care expense using Form 2441.