Do Nannies Have to Pay Taxes? Obligations Explained

Hiring a nanny involves various tax responsibilities for both the employer and the employee. Understanding these obligations is important to ensure compliance with federal and state tax laws. Navigating the tax landscape for household employment requires careful attention to classification, specific tax types, and reporting procedures.

Determining Household Employee Status

The Internal Revenue Service (IRS) defines a household employee based on the level of control an employer has over the worker. A worker is considered a household employee if the employer dictates what work needs to be done and how it is performed. This “control test” is the primary factor, regardless of whether the work is full-time or part-time. If the worker controls how the work is done, they are generally considered self-employed, which impacts tax treatment.

Nannies, housekeepers, and babysitters are typically classified as household employees because the hiring family controls their work. Conversely, independent contractors, like a self-employed gardener, determine their own work methods. Misclassifying a household employee as an independent contractor can lead to penalties for the employer.

Federal employment tax obligations are triggered once an employer pays cash wages exceeding an annual threshold to any single household employee. For 2024, this threshold is $2,700 for Social Security and Medicare taxes. Federal Unemployment Tax Act (FUTA) obligations arise if an employer pays total cash wages of $1,000 or more in any calendar quarter to all household employees. States may have their own specific rules and lower wage limits for state unemployment insurance or other state taxes.

Understanding Tax Obligations

Household employment involves several federal taxes, with specific responsibilities for both the employer and the employee. Social Security and Medicare taxes, known as Federal Insurance Contributions Act (FICA) taxes, have a combined rate of 15.3% of an employee’s cash wages for 2024. This comprises 6.2% for Social Security and 1.45% for Medicare. Both the employer and the employee each pay 7.65% of the employee’s wages, with the employer generally required to withhold the employee’s share. The Social Security tax has an annual wage base limit of $168,600 for 2024. Medicare tax has no wage base limit.

Federal Unemployment Tax Act (FUTA) tax is an employer-paid federal employment tax that funds unemployment benefits. This tax is solely an employer responsibility and is not withheld from the employee’s wages. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers can receive a credit of up to 5.4% against the FUTA tax for timely payments to their state unemployment fund, effectively reducing the net FUTA tax rate to 0.6% in most states.

Federal income tax withholding is generally optional for household employers. An employer may choose to withhold federal income tax from a nanny’s wages if the nanny requests it. Withholding income tax helps the employee manage their tax liability throughout the year, preventing a large tax bill at year-end. Employers may also be responsible for state unemployment insurance, state disability insurance, or other state payroll taxes, depending on their location and state regulations.

Fulfilling Employer Tax Responsibilities

Employers of household employees must obtain an Employer Identification Number (EIN) from the IRS. This unique nine-digit number is necessary for all household employment tax filings. Applying for an EIN is a straightforward process, typically completed online through the IRS website.

Household employment taxes, including Social Security, Medicare, and FUTA taxes, are generally reported annually on Schedule H (Household Employment Taxes) when the employer files their personal income tax return, Form 1040. Schedule H summarizes the wages paid and the calculated tax liabilities. The deadline for filing Schedule H with the Form 1040 is April 15 of the following year.

To cover these tax liabilities throughout the year, employers typically make estimated tax payments quarterly. These payments can be made using Form 1040-ES, Estimated Tax for Individuals, or through the Electronic Federal Tax Payment System (EFTPS). Payments are generally due on April 15, June 15, September 15 of the current year, and January 15 of the following year.

Employers are required to provide their household employee with Form W-2 by January 31 of the year following wage payment. This form reports total wages paid and any taxes withheld, which the nanny needs to file their personal income tax return. Employers must also submit Copy A of all W-2s along with Form W-3 to the Social Security Administration (SSA) by the same January 31 deadline. Form W-3 summarizes the wage and tax information from all W-2s.

Employers may also have state-specific tax responsibilities. These can include state unemployment insurance, state income tax withholding, or other payroll taxes unique to their state. It is advisable for employers to consult their state’s tax agencies for specific requirements and reporting procedures.

Nanny’s Tax Responsibilities

Nannies, as household employees, have their own tax obligations. They must report all wages received from household employment on their personal income tax return, Form 1040. This income must be reported even if the employer did not properly withhold taxes or issue a Form W-2.

If the employer did not withhold federal income tax from the nanny’s wages, the nanny becomes directly responsible for paying their own federal income tax. To avoid underpayment penalties, nannies typically need to make estimated tax payments throughout the year. These payments are generally made quarterly using Form 1040-ES. Estimated tax payments are usually required if a nanny expects to owe at least $1,000 in tax for the year after considering any withholding and refundable credits.

The employee’s share of Social Security and Medicare taxes (FICA) will be reflected on their Form W-2, if issued by the employer. These amounts are factored into their overall tax return. If an employer fails to withhold the nanny’s share of FICA taxes, the nanny remains liable for their portion.

Nannies may also be eligible for various tax credits or deductions when filing their income tax return. These could include standard deductions or other credits available to all taxpayers.