Nanny Tax

An Overview of the Nanny Tax

Glenn Schanel

The so-called “Nanny Tax”  came into the popular awareness in 1993, when two of President Clinton’s nominations for US Attorney General withdrew their names from consideration after it was made public that they had employed household help and had not paid the required employment taxes.  A 1994 study found that only one in five household employers had paid the required tax.

The nanny tax is the federal requirement that you pay employment taxes on household employees. You may assume that it’s something that only the wealthy need to worry about, but that is not always the case.  In 2010, the law requires payroll tax filings if you pay a household employee more than $1,700 in a calendar year.  So if you paid a babysitter, housekeeper, health aides, caretaker, etc. more than $1,700, you may be subject to the nanny tax.

I say “may be” because there are certain exceptions.  First of all, certain individuals are “excluded.”  Excluded individuals include a parent, spouse, child under age 21 or someone under age 18 whose principal occupation is not household employment (for example, a student).   Second, the nanny tax does not apply if the individual can legitimately qualify as an independent contractor.  An independent contractor controls how and when work is done, and typically works for several households.  For example, if the worker offers his or her services to the general public and has his or her own tools and supplies, that worker can most likely be considered an independent contractor and not an employee.

So how much is the nanny tax?  The nanny tax encompasses three federal employment taxes – social security, medicare and federal unemployment. The social security and medicare tax (FICA) is 15.3%, and FUTA is generally .8% of the first $7,000 of wages.  On the FICA tax, the employer can withhold half of this tax from the household employee’s pay, but as a practical matter, most people pay the employee a cash wage and are than responsible for the full amount of the FICA.  In addition to these federal taxes, you may be subject to state unemployment taxes. You aren’t required to withhold federal income taxes unless requested by your household employee.

To pay this tax, you must increase your quarterly estimated tax payments or the withholding from your wages.  As an employer of a household employee, you don’t have to file any of the normal employment tax returns that a business is required to. Instead, you just report the employment taxes on your tax return, Form 1040, Schedule H.
You will also need to obtain an employer identification number (EIN) and issue a Form W-2 to you employee.  You will also have to file any Forms W-2 with the Social Security Administration.  And any state unemployment taxes you are subject to will have to be filed and paid quarterly.

This article is just a summary of some of the various issues and requirements related to the “Nanny Tax.”  If you have any further questions, please do not hesitate to contact our offices at 561-624-2118.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

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