Do Nannies Pay Taxes? Employer and Nanny Responsibilities

Hiring a nanny involves specific tax obligations that differ from those in other employment settings. Both employers and nannies must understand these distinct rules to ensure full compliance with federal and state tax laws. Understanding the responsibilities of each party simplifies the process. Proper adherence to these guidelines helps avoid potential penalties and ensures all necessary contributions are made.

Determining Tax Obligations

Federal employment tax obligations for domestic workers arise when cash wages paid to a nanny reach a specific annual threshold. For 2024, this threshold is $2,700. If total cash wages paid in a calendar year meet or exceed this amount, the employer must generally comply with federal employment tax rules. Once this threshold is met, the wages are subject to Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes. Additionally, these wages may be subject to Federal Unemployment Tax Act (FUTA) taxes and potentially federal income tax withholding.

Most nannies are considered employees for tax purposes, not independent contractors, due to the nature of the working relationship. An employer typically controls what work is done and how it is done, which is a key indicator of an employer-employee relationship according to IRS guidelines. This distinction is important because the tax obligations for employees and independent contractors differ significantly. Misclassifying a nanny as an independent contractor can lead to substantial penalties for the employer.

FICA taxes are divided into two parts: Social Security and Medicare. Both the employer and the employee typically pay a portion of these taxes. Social Security tax is 6.2% for both the employer and employee, up to an annual wage base limit. Medicare tax is 1.45% for both parties, with no wage base limit. This means a total of 15.3% of wages (12.4% for Social Security and 2.9% for Medicare) is generally due for FICA purposes.

FUTA taxes are paid solely by the employer and fund state unemployment benefits. The federal FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee in a calendar year. However, employers often receive a credit for timely payments to state unemployment funds, which can reduce the effective federal FUTA rate to 0.6%.

Individual states also have their own unemployment insurance programs, and employers may be required to contribute to these state-specific funds. Beyond federal taxes, state-specific employment taxes may also apply, such as state unemployment insurance and state income tax withholding. These requirements vary significantly by state. Employers should consult their state’s tax agency for specific guidance on these additional obligations.

Employer Responsibilities

Employers of nannies have several specific tax duties. They must obtain an Employer Identification Number (EIN) from the IRS. An EIN is a nine-digit number assigned to employers for tax purposes. It is required for reporting wages and taxes withheld for employees, and it can be obtained quickly and free of charge online through the IRS website.

Employers are responsible for paying their share of FICA taxes, which amounts to 7.65% of the nanny’s wages. This includes 6.2% for Social Security on wages up to the annual Social Security wage base ($168,600 for 2024) and 1.45% for Medicare with no wage limit. Employers must also withhold the nanny’s 7.65% share of FICA taxes from their wages, effectively collecting the full 15.3% of FICA taxes. These amounts are then remitted to the IRS by the employer.

In addition to FICA, employers are generally responsible for paying Federal Unemployment Tax (FUTA). The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee in a calendar year. Employers typically receive a credit of up to 5.4% for contributions made to state unemployment funds, reducing the net federal FUTA tax rate to 0.6% in most cases. This tax is paid entirely by the employer and is not withheld from the nanny’s wages.

Employers may also be responsible for withholding federal income tax from the nanny’s wages if the nanny requests it. If the employer agrees to withhold, the amount is determined by the information provided by the nanny on Form W-4, Employee’s Withholding Certificate. This form helps calculate the correct amount of tax to be withheld based on the nanny’s filing status and allowances.

At the end of each calendar year, employers must prepare and provide their nanny with Form W-2, Wage and Tax Statement. This form reports the nanny’s total wages paid, federal income tax withheld (if any), and Social Security and Medicare taxes withheld. Employers must also send a copy of Form W-2 to the Social Security Administration (SSA) by January 31 of the following year. Employers report all household employment taxes on Schedule H (Form 1040), Household Employment Taxes, which is filed with their personal federal income tax return (Form 1040). Schedule H summarizes the total wages paid, FICA taxes, FUTA taxes, and any federal income tax withheld. It also calculates the total amount of household employment taxes owed.

Nanny Responsibilities

Nannies, as employees, are subject to federal income tax on their wages. The wages received from domestic employment are taxable income and must be reported on their personal federal income tax return.

If an employer withholds federal income tax from a nanny’s wages, the amount to be withheld is determined by the information the nanny provides on Form W-4, Employee’s Withholding Certificate. This form allows the nanny to indicate their filing status, dependents, and any additional income or deductions. It is important for nannies to review and update their Form W-4 if their personal or financial situation changes.

If an employer does not withhold federal income tax, the nanny becomes responsible for paying estimated taxes throughout the year to avoid potential underpayment penalties. Estimated taxes are paid quarterly to the IRS using Form 1040-ES, Estimated Tax for Individuals. These payments help ensure that the nanny meets their tax obligations as income is earned.

The employee’s portion of FICA taxes, amounting to 7.65% of wages, is also the nanny’s responsibility. Typically, this amount is withheld directly from their pay by the employer. However, if an employer fails to withhold these taxes, the nanny remains legally obligated to pay their share, potentially as part of their estimated tax payments.

At the end of the year, the nanny should receive a Form W-2, Wage and Tax Statement, from their employer. This document is essential for accurately filing their personal income tax return, Form 1040. The W-2 reports the nanny’s total taxable wages, along with any federal income tax, Social Security tax, and Medicare tax that was withheld.

Reporting and Payment Procedures

Employers are required to submit Form W-2, Wage and Tax Statement, to the Social Security Administration (SSA) by January 31 of the year following the calendar year in which wages were paid. Simultaneously, copies of Form W-2 must be provided to the nanny by the same deadline. This process ensures that the nanny has the necessary documentation to file their personal income tax return and that the SSA has accurate wage records for Social Security and Medicare benefits.

Employers report the total household employment taxes owed on Schedule H (Form 1040), Household Employment Taxes, which is filed with their personal federal income tax return, Form 1040. Schedule H consolidates all the relevant tax calculations for domestic employment, including FICA and FUTA taxes, and any federal income tax withholding.

Payment of federal employment taxes can be made through several methods. Employers can increase the tax withholding from their own wages or make estimated tax payments throughout the year using Form 1040-ES. Alternatively, they can pay the full amount due when they file their Form 1040 and Schedule H.

Nannies use the information provided on their Form W-2 to complete their personal income tax return, Form 1040. They transfer the reported wages and withheld taxes from their W-2 onto the appropriate lines of their 1040. This allows them to calculate their total tax liability, apply any credits or deductions, and determine if they owe additional tax or are due a refund.

If a nanny is required to pay estimated taxes, these quarterly payments are typically due on April 15, June 15, September 15, and January 15 of the following year. Payments can be made electronically through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS), or by mail with Form 1040-ES payment vouchers. Making timely estimated payments helps nannies avoid penalties for underpayment of taxes throughout the year.