guide to nanny payroll taxes

When you choose to hire a nanny, you find yourself in the position of being a household employer. With this comes the responsibility to accurately pay your nanny, and not doing what is easiest for you, such as paying “under the table”. Calculating, filing and paying your nanny’s payroll can be intimidating and confusing, but avoiding these important tasks will only hurt you, and your nanny, in the long run.

By properly paying the nanny tax:

• You’ll avoid paying costly fines and penalties (which could reach up to $25,000).
• You’ll protect yourself as an employer.
• You’ll help your nanny build their employment history.
• You’ll ensure that your nanny gets the Social Security and Medicare benefits he or she is entitled to when retired.
• You’ll ensure your nanny can receive unemployment benefits when your children no longer require their care.

What Are Nanny Taxes?

Nanny taxes are the payroll taxes household employers are responsible for withholding and paying when they employ a household employee, such as a nanny. The nanny tax refers to Social Security and Medicare taxes that household employers are required to withhold (and pay) for each paycheck. Under tax law, your nanny is considered a “household employee” because you control what work he or she will do or set requirements on how that work will be done. 

Here is a quick breakdown of the nanny tax criteria:

• If you will pay your nanny $2,600 or more in 2023, you must withhold and pay Social Security and Medicare on all of their wages.
• If you will pay your nanny $1,000 or more in a quarter in 2023, you must pay the federal unemployment tax or FUTA. You may also owe state unemployment taxes.

Are There Any Exceptions?

You are not required to pay the nanny tax if your nanny is:

• Your spouse
• Your child under the age of 21
• Your parent
• Any employee under the age of 18

More detail on these exceptions can be found in IRS Publication 926. 

Paying Social Security and Medicare Taxes

When paying Social Security and Medicare taxes, it’s important that you withhold the following amounts and personally set aside the same amount to match: 

• Social Security rate is 6.2%
• Medicare is 1.45%

EXAMPLE: If your nanny makes $1000 each week, you should withhold $76.50 from each paycheck and pay your nanny the remaining $923.50. You’ll then contribute $76.50 of your own money to pay your share of the taxes.

Paying Federal Unemployment Tax (FUTA)

The FUTA tax amounts to 0.6% of FUTA wages. “FUTA wages” are capped at the first $7,000 of your nanny’s cash wages during the year. In other words, you will not owe more than $42 for your nanny’s FUTA tax. You may be required to pay state unemployment taxes for your nanny. This varies from state to state so be sure to check the rules in your state.

EXAMPLE: If you pay your nanny $1,000 each week, this makes their first quarter wages (January-March) come to a total of $13,000, which is more than the $1,000-per-quarter limit we discussed earlier. So you will be paying FUTA taxes. At $1,000 per week, your nanny’s annual salary is $52,000 therefore 0.6% on the first $7,000 means you’d pay $42 for FUTA taxes for the entire year.

Forms and Payment

When it comes to payroll and taxes, multiple forms are going to be needed to report the wages you pay your household employee, and the taxes you withhold.

• Form SS-4: Now that you are a household employer you need an Employee Identification Number(EIN). Fill out Form SS-4 or apply online through the IRS to obtain your EIN.
• Form W-2: Fill out Form W-2 if you pay Social Security and Medicare wages of $2,600 or more. W2’s must be given to household employees by January 31 each year so they have enough time to file income taxes.
• Form W-3: Form W-3 is the Transmittal of Wage and Tax Statements that you send to the Social Security Administration to show the total earnings, Social Security wages, Medicare wages, and withholding for all employees in the previous year.
• Form W-4: This form is for your nanny to fill out. Though you are not required to withhold employment taxes from your nanny’s pay – he or she may ask you to. This form details the correct number of allowances for your nanny.
• Schedule H: If you pay your nanny cash wages of $2,600 or more file Schedule H. You will attach this to Form 1040 when filing taxes.
• Form I-9: Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment.
• Form 1040: This is one of three IRS forms used for personal income tax returns.

Tax Credits Can Help!

Whether you get a tax credit or take advantage of a flexible spending account (FSA), there are significant tax breaks for families employing a nanny. In fact, many families realize that their tax liability can be greatly reduced by $250 to $1,200 per year by exploring the following:

• Pre-tax Flexible Spending Accounts. Check with your employer, some companies offer these accounts (sometimes called “cafeteria plans”), which allow employees to contribute a certain amount of their pre-tax salary if it will be spent on qualifying payments like child care.
• The Child and Dependent Care Tax Credit. This can provide you with up to 35% of your childcare costs in the form of a tax credit, depending upon your adjusted gross income. To receive this credit, you must include Form W-10 and Form 2441 with your annual federal tax return. There are restrictions on both of these options according to federal law, so be sure to investigate your eligibility.

When you pay your nanny legally, both parties gain access to a variety of benefits. Not to mention the fact that this gives you peace of mind in knowing that you are adhering to all federal and state tax laws.

How SurePayroll Can Help

If nanny taxes still make you nervous or sound like a lot more time than you want to spend on paperwork, choosing to outsource your nanny payroll can be a wise choice. Some highlights of using SurePayroll for your household employee payroll needs are:  

• Federal, state and local payroll taxes paid and filed accurately.*
• A signature-ready Schedule H to attach to your annual 1040.
• 1040-ES filed on your behalf.
• W2’s provided at year-end. Most W2’s are delivered to customers by December 31^st so you have plenty of time to distribute to employees.
• Run payroll online while on the go from your mobile device.
• Access to U.S.-based customer care team available online chat, phone or email, with night and weekend hours.