With many employees shifting their primary workplace from office to home this past pandemic year, household workers who could attend to childcare, senior caregiving, common household, and personal assistant needs were in high demand. Families who retained household employees as well as the employees, themselves, often owe the “nanny tax”. If not accurately paid, the nanny tax can have negative consequences you may have easily avoided by just knowing some of the basic rules about withholding, reporting, and essential tax payments.
What are the Basic Parameters of the Nanny Tax?
The nanny tax is essentially a combination of federal and state taxes that both household employees (who aren’t independent contractors but who fulfill roles such as childcare providers, chefs, housekeepers, groundskeepers, personal assistants, and professional senior caregivers) and their employers are responsible for paying. Nanny tax payments include: Social Security and Medicare (combined together, this is known as FICA). Federal and state income taxes may also be withheld from the household employee if the employee requests it. The employer may also have to pay federal and state unemployment insurance. Individual states have varying rules when it comes to taxation so, depending on your state, nanny tax payments may differ.
For tax year 2022, the nanny tax is triggered when a household employee who is subject to it is paid $2,400 or more during the calendar year or $1000 or more per quarter.
Who Does the Nanny Tax Pertain To?
Any household worker who is not an independent contractor, who is paid in excess of the dollar amounts listed above, and is retained by a homeowner to work in their home and complete the work assigned on that employer’s schedule and in the manner they prescribe, is subject to nanny tax payments. Their employer will also need to make tax payments as a result of this type of employment arrangement.
Although, as the employer of a household worker, you aren’t obligated to withhold federal and state income taxes from your worker’s paycheck unless it’s specifically requested of you, you may still have to withhold or pay other nanny taxes.
If, during 2022, your household employee makes $2,400 or more (excluding food and housing), as their employer you must withhold and pay Social Security and Medicare taxes. Once you reach the threshold, not just the excess but all wages are subject to FICA.
The exception to this rule is if your household worker is under 18 years of age and is performing a primary role that is unrelated to child care. As his or her employer, you are not obligated to withhold FICA (as in the case of, for example, a full-time student who babysits for you, on occasion).
Nanny tax payments related to FICA must be made by both employers and household workers. Employers are responsible for withholding the worker’s portion and must pay a matching employer amount. FICA tax is divided between Social Security and Medicare with 6.2% tax assessed for the employer and the same percentage assessed for the household employee for a total of 12.4% tax. Medicare tax works similarly with 1.45% tax assessed for each party for a total tax of 2.9%. As the employer, you have the option to pay both your own and your employees FICA taxes and forego withholding that amount from your employee’s paycheck.
What Are the Logistics Involved in Paying Nanny Taxes?
Unlike other employers, if you’ve hired a household worker, you will pay nanny tax by increasing your quarterly estimated tax payments and/or increasing the withholding amount from your own wages. These tactics prevent your having to pay a larger lump sum amount at year’s end.
Even if you are required to withhold or pay taxes, you are not obligated to file a federal employment tax return in relation to your household employee situation. You will simply report employment taxes on Schedule H of your Form 1040 when you complete your usual individual tax return. While reporting your employment taxes, you will be required to supply the employer identification number (EIN) that you must obtain, prior to hiring household workers, by filing Form SS-4. You will also need to provide your household employees with a Form W-2 each year, before the end of January. State filing requirements vary, so you will need to check those requirements.
What is the Importance of Correct Reporting?
Inaccurate reporting can cause you issues in the future so it’s important that you are classifying your household employees correctly and treating your tax reporting properly.
In order to properly determine if you and your household employee will need to make nanny tax payments, it’s critical that you correctly classify them to avoid getting assessed an IRS penalty fee. If your employee is not an independent contractor but has been classified by you, as such, you may eventually owe back taxes or can even more severe tax consequences.
Paying your household employees “under the table” can also be a mistake that can cost you in the future. If your employee attempts to file for unemployment and you’ve been paying them off the books, the IRS may catch up with you if that employee lists you in their paperwork as their most recent employer. This could very well trigger an audit situation by both your state and the IRS. At a minimum, you may owe back taxes plus penalties and interest. You could also be charged with evading tax payment.
You may also be missing out on employer-related tax benefits that could minimize your tax bill if your reporting isn’t properly handled.
As always, keeping good records of the entire employment situation you’ve arranged with your household employees including details of the working arrangements you’ve agreed to, payments you’ve made to them, and tax withholding and payments you’ve made on their behalf is always a wise idea.
If you have questions about nanny tax payments and how to classify your in-home workers, please contact your Untracht Early advisorfor more information.