All About The Nanny Tax
If you pay someone to perform childcare services, you may have federal tax (and state!) obligations under the so-called "Nanny Tax." The "Nanny Tax" isn't limited to nannies. It also applies to housekeepers, maids, babysitters, gardeners, or other household employees who aren't independent contractors. The tax doesn't apply to a household employee who's also a farm worker.
If you employ someone who's subject to the "Nanny Tax," you aren't required to withhold federal income taxes from the employee's pay. You must withhold only if your nanny asks you to and you agree to withhold. (In that case, have the nanny fill out a Form W-4 and give it to you, so you can withhold the correct amount.) However, you may be required to withhold social security and Medicare tax (FICA). And you may also be required to pay (but not withhold) federal unemployment (FUTA) tax.
FICA
You must withhold and pay FICA taxes if your nanny earns cash wages of $2,300 (annual threshold) or more (excluding the value of food and lodging) during calendar year 2021 ($2,200 in 2020). If you reach the threshold, the entire wages (not just the excess) will be subject to FICA.
However, if your nanny is under age 18 and child care isn't the nanny's principal occupation, you don't have to withhold FICA taxes. So, if your nanny is really a student who is a part-time baby-sitter, there's no FICA tax liability for services the nanny provides. On the other hand, if your nanny is under age 18 and the job is the nanny's principal occupation, you must withhold and pay FICA taxes.
You should withhold from the start if you expect to meet the annual threshold; your nanny won't appreciate a large, unexpected withholding from pay later on. If you aren't sure whether the annual threshold will be met, you can still withhold from the start. If it turns out the annual threshold isn't reached, just repay the withheld amount. If you make an error by not withholding enough, withhold additional taxes from later payments.
Both an employer and a nanny have an obligation to pay FICA taxes. As an employer, you're responsible for withholding your nanny's share of FICA. In addition, you must pay a matching amount for your share of the taxes. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2% for the employer and 6.2% for the nanny, for a total rate of 12.4%. The Medicare tax is 1.45% each for both the employer and the nanny, for a total rate of 2.9%.
Example: In 2021, you pay your nanny $300 a week, and no income tax withholding is required. You must withhold a total of $22.95, consisting of $18.60 for your nanny's share of social security tax ($300 × 6.2%) and $4.35 ($300 × 1.45%) for your nanny's share of Medicare tax. You would pay the nanny a net of $277.05 ($300 − $22.95). For your (employer's) portion, you must also pay $22.95 ($300 × 7.65%), for total taxes of $45.90.
If you prefer, you may pay your nanny's share of social security and Medicare taxes from your own funds, instead of withholding it from pay. Using the figures from the above example, for each $300 of wages, you would pay your nanny the full $300 and also pay all of the total $45.90 in taxes.
If you do pay your nanny's share of these taxes, your payments aren't counted as additional cash wages for social security and Medicare tax purposes. In other words, you don't have to compute social security and Medicare tax on the payments. However, your payments of the nanny's taxes are treated as additional income to the nanny for federal income tax purposes, so you would have to include them as wages on the Form W-2 that you must provide, as explained below.
FUTA
You also have an obligation to pay FUTA tax if you pay a total of $1,000 or more in cash wages (excluding the value of food and lodging) to your nanny in any calendar quarter of the current year or last year. The FUTA tax applies to the first $7,000 of wages paid. The maximum FUTA tax rate is 6.0%, but credits reduce this rate to 0.6% in most cases. FUTA tax is paid only by the employer, not by the employee, so don't withhold FUTA from the nanny's wages.
Reporting and paying: You must satisfy your "Nanny Tax" obligations by increasing your quarterly estimated tax payments or increasing your withholding from your wages, rather than making an annual lump-sum payment.
As an employer of a nanny, you don't have to file any of the normal employment tax returns, even if you're required to withhold or pay tax (unless you own your own business, see below). Instead, you just report the employment taxes on your tax return, Form 1040, Schedule H.
On your income tax return, you must include your employer identification number (EIN) when you report the employment taxes for your nanny (states will have a reporting number as well). The EIN isn't the same number as your social security number. If you already have an EIN from a previous nanny, you may use that number. If you need an EIN, you must file Form SS-4 to get one..
However, if you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes for your nanny.
You're also required to provide your nanny with a Form W-2. If the nanny's 2020 wages are subject to FICA or income tax withholding, the W-2 is due by Feb. 1, 2021. Additionally, you must file a Form W-2 for 2020 with the Social Security Administration by Feb. 1, 2021. Your EIN must be included on the Form W-2.
Recordkeeping
Be sure to keep careful employment records for each nanny and other domestic employee. Keep the tax records for at least four years from the later of the due date of the return or the date when the tax was paid. Records should include: employee name, address, social security number; dates of employment; dates and amount of wages paid; dates and amounts of withheld FICA or income taxes; amount of FICA taxes paid by you on behalf of your nanny; dates and amounts of any deposits of FICA, FUTA or income taxes; and copies of all forms filed.
This is a lot of information to absorb. We are happy to go over any questions you still have about how to comply with these employment tax requirements. Please reach out to your client manager to schedule a call or send us an email at cpa@sherwoodtax.com and we can help navigate this with you!
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