How to Calculate Federal and State Nanny Taxes

Household employment, often referred to as “nanny taxes,” involves specific tax obligations for individuals who hire household help. These taxes ensure that household employees contribute to and receive benefits from programs like Social Security, Medicare, and unemployment insurance. Understanding these responsibilities is important for compliance with federal and state tax laws, securing future benefits for the employee, and ensuring the employer fulfills their legal duties.

Determining Your Federal Tax Obligations

Employers must first determine if their household employment triggers federal tax obligations. For Social Security and Medicare taxes (FICA taxes), an employer has a tax responsibility if they pay a household employee cash wages of $2,700 or more in a calendar year. This threshold applies to the total cash wages paid to any single household employee.

Wages encompass cash and the fair market value of non-cash payments, such as food, lodging, or transportation. Federal Unemployment Tax (FUTA) obligations arise if an employer pays total cash wages of $1,000 or more to household employees in any calendar quarter during the current or preceding calendar year. This threshold considers the cumulative wages paid to all household employees. Both FICA and FUTA thresholds are set annually and apply per calendar year, requiring employers to track wages carefully. If these wage thresholds are met, the employer is subject to these federal payroll taxes.

Calculating Federal Nanny Tax Amounts

Once federal tax obligations exist, calculate the specific amounts owed for FICA and FUTA taxes. For FICA taxes, the total rate is 15.3% of the employee’s cash wages, split equally between the employer and the employee. The employer is responsible for 7.65% of the employee’s wages, while the employee’s share is also 7.65% (6.2% for Social Security and 1.45% for Medicare). The Social Security portion of FICA taxes applies only up to an annual wage base limit, which is $168,600 for 2024; wages paid above this amount are not subject to the Social Security tax, but the Medicare tax continues on all wages.

The employer can either withhold the employee’s 7.65% share from their wages or pay both portions. If the employer pays the employee’s share, that amount becomes additional taxable income to the employee, which must be reported. For example, on $10,000 of wages, the employer’s FICA share would be $765, and the employee’s share would also be $765, totaling $1,530. The Federal Unemployment Tax (FUTA) is generally 6.0% on the first $7,000 of wages paid to each employee during the calendar year. However, employers receive a credit of up to 5.4% against the FUTA tax for timely payments to a state unemployment fund, effectively reducing the federal rate to 0.6% on the first $7,000 of wages.

Calculating State Nanny Tax Amounts

Beyond federal obligations, employers of household employees also face state-level tax requirements, primarily State Unemployment Insurance (SUI). SUI rates and the wage base vary significantly by state. Each state’s unemployment agency sets its own SUI tax rate, which can range from under 1% to over 10% for new employers. These rates are “experience-rated,” meaning they may adjust over time based on an employer’s history of unemployment claims.

To determine the specific SUI rate and wage base, employers should consult their state’s labor or workforce development department website. These state agencies provide detailed information on tax rates, wage bases, and reporting requirements. Some states may also impose additional taxes, such as state disability insurance or paid family leave contributions, though SUI is the most common state-level tax for household employment.

Preparing for Tax Reporting and Payment

Employers must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), which serves as a unique identification number for tax purposes. An EIN can be applied for online through the IRS website, receiving it immediately after completing the application. This number is required for all federal tax filings related to household employment.

Have the employee complete Form W-4, Employee’s Withholding Certificate, at the start of employment. This form provides the employer with information to determine the correct amount of federal income tax to withhold from the employee’s wages, if any. Throughout the year, employers must also maintain accurate records of wages paid, including cash wages and the fair market value of any non-cash wages, as well as federal and state taxes withheld or paid. This record-keeping is essential for preparing Form W-2, Wage and Tax Statement, which must be provided to the employee by January 31 of the following year.

Reporting and Paying Nanny Taxes

Federal nanny taxes are reported and paid through specific IRS forms and payment systems. Household employers report their obligations on Schedule H (Form 1040), Household Employment Taxes, filed with their annual personal income tax return. This form summarizes the total FICA and FUTA taxes owed for the year.

Employers must also issue Form W-2, Wage and Tax Statement, to their employee by January 31 of the year following employment, detailing wages paid and taxes withheld. A copy of Form W-2, along with Form W-3, Transmittal of Wage and Tax Statements, must be filed with the Social Security Administration (SSA) by January 31.

Federal nanny taxes can be paid throughout the year through estimated tax payments using Form 1040-ES, Estimated Tax for Individuals, made quarterly. Alternatively, employers can use the Electronic Federal Tax Payment System (EFTPS), a free service provided by the U.S. Department of the Treasury, for electronic payments. State unemployment taxes and any other state-specific household employment taxes are reported and paid directly through the respective state’s labor or tax department, often through their online portals, following their specific payment schedules and forms.