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Nanny Tax

Article byDinanath Singh
Reviewed byDheeraj Vaidya, CFA, FRM

Nanny Tax Definition

Nanny Tax refers to the tax that an individual pays to the government when they employ household employees such as gardener, housekeeper, babysitter, cooks as per US Law and UK Law.

Suppose a family hires a housekeeper to do housekeeping service, and his wages are $4000 in a year. The family will deduct some amount as social security medicare taxes as well as federal and state income tax and pay it to the government. The family will also pay towards social security medicare taxes as well as federal and state unemployment insurance to the government.

Nanny Tax

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Why Pay Nanny Tax?

There are some important reasons why one should pay the nanny tax.

  • It is a legal requirement of a family or individual who hires house workers.
  • It can provide childcare tax credit benefits.
  • It provides social security at the time of retirement of household employees.
  • If an individual removes his cook, then the cook can get unemployment benefits for the loss of his job.
  • If an individual pays taxes legally, then his house worker can get a medical care subsidy.
  • Paying a nanny tax will motivate the worker.
  • If an individual pays tax regularly and legally, then his workers will be eligible for medical care after retirement.

How are Nanny Taxes Paid?

There are two kinds of taxes that require to be paid.:

  • Taxes withheld from household employees such as social security medicare taxes, also known as FICA taxes and the same amount employer will also pay to the government.
  • Employers will also pay Employment tax, such as federal unemployment insurance tax. Then the employer will file the return either monthly basis, annually, quarterly.

Steps to Handle Nanny Tax

The employer should first have his employer identification number, which he can obtain from the IRS.

There are the steps you need to follow for nanny tax –

  1. Before hiring a housekeeper, the employer must obtain the following documents.

    • Employers need to take a social security number or an ITIN of Housekeeper.
    • Employers need to obtain a completed form of Form I-9 with the proper identification number from housekeepers because Form I-9 shows the eligibility of a household worker.
    • Employers need to obtain federal W-4 form and state income tax withholdingTax WithholdingWithholding tax is a part of the salary an employer withholds from an employee's compensation and pays to the legal authorities. It is treated as collateral imposed against the taxes an employee is liable to pay during a particular year.read more form.

  2. Employer needs to obtain a tax ID number

    Employer needs to obtain a tax ID number such as federal and state identification numbers from the respective tax department of that States.

  3. Calculate taxes withheld of worker and employer taxes

    You need to calculate taxes withheld of worker and employer taxes based on wages paid to household employees. This can be done by hiring some experts or employers will do himself. Employers will pay withheld tax along with his own income tax to avoid penalties on the underpayment of tax.

  4. File the return either quarterly, annually, monthly

    You need to file the return either quarterly, annually, monthly as per the prevailing law of that state, and need to send Form 1040 about the estimated payment to IRS four times per year.

  5. Employer must provide Form W-2 to his household employees at the end of Jan each year so that employees can use it to file his tax returns.


    • File Form W-3 also as per social security administration and submit form W-2 part A.
    • Prepare Schedule H, and employers need to fill it with his federal income taxFederal Income TaxFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more.
    • Prepare the Annual reconciliation statementReconciliation StatementA reconciliation statement contains a list of differences between bank balance as per bank statement, books of accounts, debtor-creditor reconciliation, debt balance reconciliation, or any other reconciliation with a difference in the records of two separate legal entities, and it aims at nullifying the difference.read more also that summarizes withheld tax from a nanny.
    • Employers need to keep track of any changes that happened in nanny taxes.
    • Employers need to reply to any federal or state notices.

How do I know if I need to Pay Nanny Tax?

If you hire a cook, babysitter, gardener, housekeeper, any person for household work, and pay wages, which falls under the provision of law, then you need to pay nanny taxes.

Let’s understand this concept with the help of some examples.

Example #1

Suppose a family hire cook, and if the employer pays wages more than $2100 in a year, then the employer is required to withhold tax, social security medicare taxes, also known as FICA @ 7.65% of cash wages and employer will also pay 7.65% FICA taxes.

Now suppose if the family pays wages of $1000 or more per quarter to his household employees, then the employer is required to pay 6% of the first $7000 wages per employee as federal unemployment taxes.

Example #2

Nanny tax deduction

Suppose a family hire a house cleaner and pay him wages, then employers need to withhold taxes such as social security medicare taxes, and the same amount of employer will also pay as FICA taxes.

Some examples of nanny taxes are social security taxes, medicare taxes, federal unemployment taxes.

Advantage

  • The major advantage of paying nanny taxes is the employer can take a tax credit of the same and can reduce his tax liability. Employers will save lots of tax liability by doing this.
  • Household employees will enjoy medical benefits and social security.
  • Household employees will have an advantage while applying for any type of loan, such as car loans, education loans, mortgage loans.
  • By paying nanny taxes, employers can save themselves from income tax notice.
  • Household employees will be motivated and feel secure.
  • The housekeeper can get some extra benefits like their children’s tuition fee, their transportation expenses.
  • Parents who hire a babysitter and pay nanny taxes can claim as childcare credit.
  • By paying nanny taxes employer who running some business can avoid legal notice.
  • It builds a good relationship between the employer and household employees.
  • If an employer hires to take care of his parents, then he can claim a tax deduction for this payment.

Conclusion

Nanny tax is the legal duty of each household employer who hires household employees. Each employer should follow the guidelines of the government and pay nanny taxes regularly and file their return to avoid being unethical. Each employer should maintain proper books of accounts for better control purposes.

This has been a guide to what is Nanny Tax and its definition. Here we discuss why and when to pay the nanny taxes along with the examples. You can learn more from the following articles –

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