Often we receive questions about the federal tax obligations under the so-called “Nanny Tax.” The “Nanny Tax” is not limited to nannies. It also applies to housekeepers, maids, babysitters, gardeners or other household employees who are not independent contractors. The tax does not apply to a household employee who is also a farm worker.

If you employ someone who is subject to the “Nanny Tax,” you may or may not be required to withhold federal income taxes from the employee’s pay. You also may or may not 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.

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.

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.

The easiest, safest and most efficient way to pay a household employee is through a payroll service that automatically calculates, withholds, and files the payroll taxes and produces the W-2s. We recommend either of these payroll tax filing services: 1) Intuit Online Payroll Household Service, which is designed specifically for anyone paying household employees, and 2) Gusto.  These payroll tax filing services keep up with the tax laws and regulations and automatically handle the tax filings for you. 

Recordkeeping: You are obligated to keep accurate employment records for each nanny and other domestic employees. 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. Either of the recommended payroll services will compile and provide those records to you.

If you have questions about how to comply with these employment tax requirements, contact our office.

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