Avoid Nanny Tax Nightmares
Don’t let the IRS catch you paying your household helper under the table. It’s estimated that 75% to 95% of people who employ nannies, sitters, housekeepers, and home health aides don’t bother paying employment taxes. While many people inadvertently (or “unknowingly”) ignore the rules and pay their home helpers under the table, you’re doing yourself and your employee a disservice.
Failure to pay employment taxes (e.g., the nanny tax) can cost on average $25,000 in penalties and interest. Not only that, but when you don’t report the wages you pay, your employee has a harder time building their employment history, will have a less comfortable retirement because they won’t get all the Social Security and Medicare benefits they’ve earned, and when you no longer need their services, they may not qualify for unemployment benefits.
For purposes of federal tax, employers must withhold and pay FICA taxes (7.65%) if they paid a household employee cash wages of at least $2,000 in 2016 or in 2017 ($2,100 in 2018). Employers must pay FUTA tax (6%) if they paid total cash wages of at least $1,000 in a calendar quarter to household employees. A homeowner may be an “employer” to a nanny or housekeeper or, if enough evidence is shown, merely a recipient of services by an independent contractor or self-employed individual.
Determining Employer Status
If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes.
If the individual who works in your home is self-employed and you do not direct him or her on specific tasks, you aren’t liable as an employer – a difficult hurdle to overcome in the case of childcare. Usually, you aren’t a household employer if the person who cares for your dependent or spouse does so at their home or place of business.
If you use a placement agency that exercises control over what work is done and how it will be done by a baby-sitter or companion who works in your home, the worker isn’t your employee. This control could include providing rules of conduct and appearance and requiring regular reports. In this case, you don’t have to pay employment taxes. But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee.
Employer Responsibilities
If you have a household employee, you may be subject to:
- Social security and Medicare taxes
- Federal unemployment tax
- Federal income tax withholding.
Social security and Medicare taxes are generally withheld from the employee’s pay and matched by the employer. Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. Federal income tax is withheld from the employee’s total pay if the employee asks you to do so and you agree.
An employer must report and pay required employment taxes for household employees on Schedule H of the employer’s Form 1040 or Form 1040A. While withheld amounts do not have to be deposited on a monthly basis, the employer does need an employer identification number (EIN) to include on the employee’s Form W-2 and the employer’s Schedule H. To obtain an EIN, an employer should complete Form SS-4.
An employer must increase either their quarterly estimated tax payments or the income tax withholding on his or her own wages in order to satisfy employment tax obligations with respect to household employees. Failure to withhold results in liability for the penalty for underpayment of estimated tax.
Child and Dependent Care Tax Credit
The good news is that a credit is allowed for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer, and the taxpayer’s spouse if filing a joint return, to be gainfully employed. The Social Security “Nanny” Taxes you pay on wages for qualifying child and dependent care services are themselves considered work-related expenses for purposes of this credit.
If you need advice on whether the person you have taking care of your child qualifies for the nanny tax, please consult your tax accountant in our office.
