How Much Are Nanny Taxes & How to Calculate Them

Navigating the financial responsibilities of employing household help can seem complex, but understanding “nanny taxes,” formally known as household employment taxes, is an important step for many families. These taxes are a legal requirement for certain employers and cover contributions to Social Security, Medicare, and unemployment insurance programs. This article will provide guidance on determining your obligations, calculating federal and state tax amounts, and properly reporting and paying these taxes.

Determining Your Nanny Tax Obligations

You become a household employer for tax purposes when you hire someone to work in your home and control their work. This means the worker is an employee, not an independent contractor, regardless of full-time or part-time status, or if hired through an agency. Household employees include nannies, housekeepers, caregivers, and gardeners. Conversely, if a worker controls how the work is done, provides their own tools, and offers services to the general public, they are likely self-employed, and you would not owe household employment taxes.

Federal tax obligations arise when certain wage thresholds are met. For 2024, if you pay any one household employee cash wages of $2,700 or more, you must pay Social Security and Medicare taxes. Cash wages include payments by check or money order, but exclude the value of non-cash items like food or lodging. Federal unemployment tax (FUTA) applies if you paid total cash wages of $1,000 or more to household employees in any calendar quarter of 2023 or 2024.

Certain individuals are exempt from Social Security and Medicare taxes, such as an employee who is your spouse, your child under age 21, or your parent. Wages paid to an employee under the age of 18 at any time during the tax year are not subject to Social Security and Medicare taxes. While federal income tax withholding is optional for household employees, it can be done if both you and the employee agree. State taxes, including state unemployment insurance and potentially state income tax withholding, also apply and vary by location.

Calculating Federal Nanny Taxes

Calculating federal nanny taxes involves Social Security and Medicare taxes (FICA), Federal Unemployment Tax Act (FUTA) taxes, and any agreed-upon federal income tax withholding. FICA taxes fund Social Security and Medicare programs, with both the employer and employee contributing. For 2024, the Social Security tax rate is 6.2% for both the employer and employee, applied to wages up to the Social Security wage base limit of $168,600. The Medicare tax rate is 1.45% for both the employer and employee, with no wage base limit, meaning it applies to all taxable wages.

The combined FICA tax rate is 15.3% (7.65% for the employer’s share, and 7.65% for the employee’s share). If an employee’s wages exceed $200,000 in a calendar year, an additional Medicare tax of 0.9% applies to the employee’s wages above that threshold. This additional tax is withheld only from the employee’s wages and has no employer match.

FUTA tax funds state unemployment compensation programs. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers can claim a credit of up to 5.4% for contributions paid to state unemployment funds, which can reduce the effective federal FUTA tax rate to 0.6%. To qualify for this maximum credit, state unemployment contributions must be paid by the Form 940 due date. Some states may be designated as “credit reduction states” if they have outstanding federal unemployment loans, which can reduce the available credit and increase the effective FUTA tax rate for employers in those states.

Federal income tax withholding is not mandatory for household employees, but if you and your employee agree to it, the employee must complete Form W-4, Employee’s Withholding Certificate. You would then use the information from Form W-4 and the appropriate withholding tables from IRS publications to determine the amount to withhold from each paycheck. This withholding helps the employee meet their income tax obligations throughout the year.

Calculating State Nanny Taxes

State nanny taxes involve State Unemployment Insurance (SUI) and state income tax withholding. Most states require employers to pay SUI, which funds unemployment benefits. SUI tax rates and the wage bases to which they apply vary significantly by state. New employers are assigned a standard new employer rate, which can range from a low percentage to several percent, for a set period, often a few years.

After this initial period, an employer’s SUI rate may become “experience-rated,” meaning it can increase or decrease based on the number of unemployment claims filed by former employees. Some states may also require employees to contribute to unemployment taxes, though this is less common. To determine your specific SUI rate and wage base, consult your state’s labor department or unemployment agency.

State income tax withholding for household employees is required in some states, optional in others. If state income tax withholding is required or if you and your employee agree to it, the employee needs to complete a state-specific withholding form, similar to the federal Form W-4. Use this form and state-specific withholding tables or calculations to determine the amount to withhold. Checking your state’s tax agency website is important for guidance on state income tax withholding requirements and procedures.

Reporting and Paying Nanny Taxes

After calculating the federal and state nanny taxes, employers must report and pay these amounts to the respective government agencies. For federal taxes, at the end of the year, you must provide each household employee with a Form W-2, Wage and Tax Statement, by January 31 of the following year. This form reports the employee’s annual wages and the taxes withheld. You must also submit Copy A of Form(s) W-2 along with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration (SSA) by the same deadline.

Household employment taxes, including Social Security, Medicare, and FUTA taxes, are reported annually to the IRS on Schedule H (Form 1040), Household Employment Taxes. This schedule is filed with your personal income tax return, Form 1040, or can be filed separately if you are not otherwise required to file a Form 1040. The filing deadline for Schedule H with your Form 1040 is April 15 of the year following the tax year.

Most household employers pay their nanny taxes throughout the year rather than in a lump sum at tax time. This is done through estimated tax payments using Form 1040-ES, Estimated Tax for Individuals, or by increasing the income tax withholding from their own paychecks. Estimated tax payments are due quarterly, with common deadlines being April 15, June 15, September 15, and January 15 of the following year. Payments can be made electronically through the Electronic Federal Tax Payment System (EFTPS), a free service provided by the U.S. Treasury. EFTPS allows you to schedule payments in advance and track your payment history.

For state-specific taxes, reporting and payment requirements vary. State unemployment insurance (SUI) taxes require quarterly reports and payments to your state’s unemployment agency. State income tax withholding, if applicable, also has its own reporting and payment schedule, which may be quarterly or annual depending on the state’s rules and the amount of tax withheld. Consult your state’s tax agency website for specific forms, deadlines, and payment methods to ensure full compliance with state household employment tax laws.