The onset of COVID-19 has changed how we live and work. It’s also changed, and complicated, how parents go about providing childcare for their children. Many people are deciding to pay a nanny in their home and are unaware of what requirements there are on them from a tax standpoint. Let’s explore the reporting and taxation considerations of becoming a household employer (you can also check out this blog from our wealth management team if you’re thinking about hiring a nanny).
A Nanny Is Your Employee
A nanny is considered a household employee. As your employee, you are required to obtain identifying information from your employee by completing an I-9 Employee Eligibility Form. This is technically a U.S. Citizenship and Immigration Services (USCIS) form, not an IRS form. This form is required to be completed and in the employer’s possession on the first day your employee reports for work. As an employer, you are required to have proof to determine your employee is legally authorized to work in the United States. This can be verified by obtaining two forms of identification from your employee (outlined on the I-9 Form) and retaining these records securely.
Your Nanny Is Not An Independent Contractor
An independent contractor is defined by the IRS as someone who controls the environment of their work. A nanny would not be able to do this because generally, you would have certain requirements on time and location of work, i.e. having care for your children based on set times and dates.
So What Is “Nanny Tax”?
Nanny taxes are Social Security and Medicare (FICA) taxes. You are legally obligated to withhold them from your employee’s earnings if you pay them $2,200 or more in calendar year 2020. As of 2020, you and your employee must each pay 6.2% for Social Security and 1.45% for Medicare, for a combined total of 7.65% each—or 15.4% including both your contributions. This means you must withhold the employee’s share and pay your share as the employer. These amounts must be remitted on behalf of your employee at least annually.
What About Unemployment Taxes?
As the employer of a household employee, you are also required to contribute to federal unemployment tax (FUTA). You must pay into FUTA if you pay an employee $1,000 or more in any calendar quarter, up to $7,000 a year. This tax works out to an additional 6% over your FICA contributions. This tax is solely the responsibility of the employer; the employee does not contribute a portion of the payment.
What About Withholding Taxes?
As a household employer, you are not required to do income tax withholding. This means your nanny will not electively determine to have you, the employer, withhold a portion of their pay to be remitted to the IRS to be put towards their subsequent refund or lessen the amount of tax owed.
How Do I Pay These Taxes to The IRS?
Prior to tax season and upon hire of your nanny, a household employer should obtain an Employer Identification Number (EIN). This is done by completing Form SS-4 with the IRS. Your EIN will be used on the W-2 that you provide to your household employee.
At tax time, you must also provide:
- A W-2 is required to be issued to your nanny. The W-2 will list your EIN as an identifier to you as the employer. This is due to the employee by February 1, 2021.
- You must submit a W-2 and W-3 to the Social Security Administration by February 1, 2021.
- You will file a Schedule H (Household Employment Tax) with your 1040 tax return. This form is where you will reconcile and calculate taxes owed as a household employer.
Tax time can be a stressful time for many of us – myself included – and diving into a possibly unfamiliar part of your taxes, like having a nanny, might be increasing your blood pressure. We understand. If you have any questions on this topic, please don’t hesitate to reach out via email.