When you have household employees, such as a nanny for your childcare or a maid or a house cleaner to help you stay on top of chores around the home, it can be expensive and time-consuming to figure out your tax responsibility. If you have household employees, you should certainly review the comprehensive nanny tax guide from GTM.com to help you save time and money as you prepare to file your income taxes for last year.
According to the IRS, you need to pay nanny taxes if you employ a nanny to perform duties in or around your home. If you have paid a person to care for your children, and you designate when, where, or how their work is performed, the nanny is considered a household employee, and you need to pay taxes on their income. However, if you have paid them less than $2,200 in a calendar year ($2,100 was the threshold for the 2019 tax year), you don’t need to pay taxes.
The employer’s contribution of nanny taxes depends on his or her salary. When you hire a nanny as a household employee, you will agree on their wages or an hourly rate of pay. You will also need to determine whether you will withhold the taxes from the nanny’s gross salary or pay the taxes on top of her take-home pay.
Usually, you’ll end up paying about 10% of the nanny’s salary, but this amount will depend on annual tax rates and any wage caps in your state. To determine your rate, follow these steps:
- Apply for an EIN online. Your Employer Identification Number will be necessary for completing your nanny’s W-4 or W-9 form for tax records. After you complete your EIN application, you’ll receive forms that include your tax rate. Then, you’ll need to file with your state’s unemployment office. You may have to pay state taxes and federal taxes, and your state’s unemployment office will provide you with your rate.
- Issue Pay Stubs with Each Pay Period. You are required to provide your nanny with a pay stub for every pay period in which he or she worked. This should note gross wages and any deductions for Social Security and Medicare taxes, and any deductions for federal income tax withholding or state unemployment taxes. You’ll also need to calculate and deduct any Federal Unemployment taxes (FUTA) – the current rate is 6%.
- Pay Taxes According to Deadlines. You’ll need to pay federal taxes each month using the Electronic Federal Tax Payment System (EFTPS), including taxes for Social Security and Medicare. Follow your state unemployment office’s guidelines for filing and paying any unemployment taxes. Once you owe more than $500 in FUTA tax, it’s time to file your Form 940 and pay the tax – this may only occur once per year, but if you owe more than $500 in FUTA tax, you may need to file quarterly.
You can take advantage of some tax credits to offset the cost of nanny taxes and save money.
Luckily, there are tax breaks that you may qualify for to reduce your nanny tax costs, but these only apply if you pay your nanny legally following the steps above. There are generally two different methods to save money on your nanny taxes:
- Withhold pre-tax funds from your paycheck to cover care for your dependents. Check with your employer to see if they offer a Flexible Spending Account (FSA) for dependent care reimbursements.
- Take advantage of the Child & Dependent Care tax credit. This credit helps to reduce your federal income taxes when you file your federal tax return, but you must meet specific requirements. Learn more by reading the IRS Publication 503.
You may also be able to receive a credit on your FUTA tax rate if you also paid state unemployment taxes for your employee. Read the IRS documentation about FUTA Credit Reduction for more information. Generally, you must pay federal unemployment tax (FUTA) tax on the first $7,000 of cash wages you paid to your nanny.