How to Pay Nanny Taxes Yourself as an Employer

When employing someone for household duties, such as a nanny, housekeeper, or caregiver, you may take on tax responsibilities similar to those of a business. These “nanny taxes” apply when wages paid to a household worker reach certain thresholds. Understanding and complying with these requirements is important for household employers to avoid penalties. This guide outlines the process for managing these tax obligations yourself, from determining what you owe to fulfilling annual reporting requirements.

Determining Your Nanny Tax Obligations

For 2024, if you pay any single household employee cash wages of $2,700 or more in a calendar year, you must pay Social Security and Medicare taxes. If you pay total cash wages of $1,000 or more to household employees in any calendar quarter of the current or preceding year, federal unemployment tax obligations may apply.

Distinguishing between an employee and an independent contractor is important. An individual is considered your employee if you control what work is done and how it is done. If the worker controls how they perform the work, provides their own tools, and offers services to the general public, they are likely an independent contractor. Misclassifying an employee can lead to penalties and unpaid tax liabilities.

Federal household employment taxes include Social Security and Medicare taxes (FICA taxes), and Federal Unemployment Tax (FUTA). FICA taxes fund retirement, disability, and healthcare benefits, while FUTA taxes contribute to the federal unemployment compensation program. Beyond federal taxes, you may also face state unemployment taxes (SUTA) and state income tax withholding, which vary by state.

Setting Up as a Household Employer

Once you determine you have household employment tax obligations, establish your identity as an employer with the appropriate tax authorities. This begins with obtaining an Employer Identification Number (EIN) from the IRS. An EIN functions like a Social Security number for businesses and is necessary for reporting and paying federal employment taxes.

Applying for an EIN is free. You can apply online through the IRS website for immediate receipt. Alternatively, apply by faxing or mailing Form SS-4, Application for Employer Identification Number, though these methods take longer. Ensure all information on Form SS-4 is accurate to avoid delays.

In addition to federal registration, household employers must register with their state’s unemployment tax agency for SUTA. Procedures and requirements vary by state; consult your state’s Department of Labor or equivalent agency for instructions. Some states may also require registration for state income tax withholding if you choose to withhold state income tax from your employee’s wages.

Managing Payroll and Withholding

Accurately calculating payroll and tax withholding for each pay period is central to managing nanny taxes. Begin by determining the employee’s gross wages, their total earnings before deductions. This calculation forms the basis for all subsequent tax computations.

For federal taxes, FICA taxes are a primary consideration. Both the employer and employee each pay 6.2% for Social Security and 1.45% for Medicare, totaling 7.65% from each party. The employer is responsible for withholding the employee’s share and remitting both portions to the IRS. For 2024, the Social Security wage base limit is $168,600; there is no wage limit for Medicare tax.

Federal income tax withholding is not mandatory for household employers, but it is advisable for the employee to prevent a large tax bill at year-end. If your employee wishes to have federal income tax withheld, they should complete IRS Form W-4, Employee’s Withholding Certificate. This form provides information to calculate the amount of federal income tax to deduct.

Federal Unemployment Tax (FUTA) is an employer-only tax. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year. Employers receive a credit of up to 5.4% for timely paid state unemployment taxes, effectively reducing the FUTA tax rate to 0.6% in most states. State unemployment taxes (SUTA) and state income tax withholding calculations vary by state, so refer to your specific state’s guidelines. Maintain records of all wages paid, taxes withheld, and taxes remitted for compliance.

Remitting Taxes to Authorities

After calculating payroll and withholding amounts, remit these taxes to federal and state authorities. Federal income tax withheld, Social Security tax, and Medicare tax are reported quarterly using IRS Form 941, Employer’s Quarterly Federal Tax Return. Some small employers may file Form 944, Employer’s Annual Federal Tax Return, annually if their estimated annual tax liability is $1,000 or less, or in some cases, $2,500 or less. The IRS notifies eligible employers if they qualify for Form 944.

The Electronic Federal Tax Payment System (EFTPS) is the recommended method for federal tax payments. This free service allows online or phone payments. Enroll in EFTPS; it takes five to seven business days to receive your PIN by mail. Schedule payments by 8 p.m. ET the day before the due date for timely receipt.

Federal Unemployment Tax (FUTA) is paid with your estimated income tax payments using Form 1040-ES. Calculate your FUTA liability quarterly and include it with your personal estimated tax payments. State unemployment taxes (SUTA) and any state income tax withholding must be paid directly to respective state agencies. Payments are often quarterly, but frequencies and methods vary by state, often involving online portals.

Fulfilling Annual Reporting Requirements

The annual tax cycle concludes with specific reporting requirements to your employee and the federal and state governments. By January 31st of the year following wage payment, provide your household employee with Form W-2, Wage and Tax Statement. This form summarizes their gross wages and federal income, Social Security, and Medicare taxes withheld. Obtain blank W-2 forms from the IRS or tax software.

Along with providing W-2s to your employees, send Copy A of all W-2s, accompanied by Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration (SSA). Form W-3 summarizes all W-2 forms submitted. Both Forms W-2 and W-3 are due to the SSA by January 31st.

Household employers report their share of Social Security, Medicare, and Federal Unemployment (FUTA) taxes on Schedule H (Form 1040), Household Employment Taxes. This form is filed with your personal income tax return. Schedule H consolidates the annual totals of these taxes. Transfer wage and tax information from your payroll records to Schedule H. Many states also have corresponding annual reporting requirements for wages paid and taxes withheld, which should be filed with relevant state agencies.