How to Pay Nanny Taxes: What Employers Need to Know

“Nanny taxes” refer to the collection of federal and state employment taxes that apply when individuals hire household staff. These taxes are not a separate tax category but rather an employer’s obligation, similar to those faced by traditional businesses. Understanding and complying with these tax requirements is important for household employers to avoid penalties and ensure proper reporting for their employees.

Determining Your Obligation

Household employers must assess whether their wage payments trigger federal tax obligations. For Social Security and Medicare taxes, known as FICA taxes, employers are generally required to withhold and pay if they pay any one household employee cash wages of $2,700 or more in 2024. If this threshold is met, all wages paid to that employee, not just the amount exceeding the threshold, become subject to FICA taxes, unless specific exemptions apply for certain family members or employees under 18.

Federal Unemployment Tax Act (FUTA) obligations arise if an employer pays total cash wages of $1,000 or more to all household employees in any calendar quarter of the current or preceding year. The FUTA tax applies to the first $7,000 of cash wages paid to each employee annually. State unemployment insurance (SUI) requirements vary by state, often requiring separate registration and reporting.

Initial Setup for Employers

Before managing payroll and taxes, household employers must complete initial setup steps. The first step involves obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The EIN serves as a federal tax identification number for employers, much like a Social Security number identifies an individual, and it is required on all tax filings related to household employment. Employers can apply for an EIN online through the IRS website, or by submitting Form SS-4 via fax or mail.

Household employers need to register with relevant state agencies. This registration is necessary for state unemployment insurance (SUI) and state income tax withholding. Requirements and processes differ significantly across states, so employers should consult their specific state’s labor or revenue department websites for precise instructions and forms. Completing these federal and state registrations establishes the employer’s legal standing to comply with ongoing tax obligations.

Managing Payroll and Withholding

Managing payroll for household employees involves calculating withholding and employer contributions. Federal FICA taxes consist of Social Security and Medicare taxes, which are split between the employer and employee. For 2024, both the employer and employee each pay 6.2% for Social Security on wages up to $168,600, and 1.45% for Medicare with no wage limit. The employer is responsible for remitting both their share and the employee’s withheld share of FICA taxes.

Federal Unemployment Tax (FUTA) is solely an employer-paid tax. The FUTA tax rate is 6% on the first $7,000 of an employee’s wages, but employers can receive a credit of up to 5.4% for timely state unemployment tax payments, effectively reducing the net federal rate to 0.6%. While federal income tax withholding is not mandatory for household employees, employers can agree to withhold it if the employee requests and completes a Form W-4, Employee’s Withholding Certificate. This form provides information for calculating the appropriate amount of federal income tax to withhold from wages.

State-level taxes, such as state unemployment insurance (SUI) and state income tax withholding, require calculation. SUI rates and wage bases vary by state and can fluctuate based on an employer’s experience rating, which factors in unemployment claims from former employees. Some states may also require employee contributions to SUI. Maintaining accurate records of all wages paid, taxes withheld, and employer contributions is important for accurate reporting and compliance.

Reporting and Paying Taxes

After payroll calculations are complete, household employers must fulfill reporting and payment obligations. Federal household employment taxes are reported annually on Schedule H (Household Employment Taxes), which is filed with their individual income tax return, Form 1040. Schedule H summarizes the Social Security, Medicare, and FUTA taxes owed, as well as any federal income tax withheld. Even if an individual is not required to file a Form 1040, they must file Schedule H by itself if household employment taxes are due.

Employers must also provide each household employee with a Form W-2, Wage and Tax Statement, by January 31 of the year following the tax year. This form details the employee’s wages and withheld taxes. A copy of each W-2, along with a summary Form W-3, Transmittal of Wage and Tax Statements, must be submitted to the Social Security Administration by the same deadline.

Federal household employment taxes are paid throughout the year through estimated tax payments. These payments can be made quarterly using Form 1040-ES, Estimated Tax for Individuals, or by increasing withholding from the employer’s own wages if they are also employed. Payments can be made electronically via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS). State reporting and payment procedures for unemployment insurance and income tax withholding vary by state, often involving quarterly wage reports and online payment portals specific to each state’s tax agency.