As an agency, one of the most common questions we get when a family calls us to hire a nanny is, “What are the extra costs involved.” One of the costs that many employers may not know about is something commonly referred to as the “Nanny Tax.”
The Nanny Tax is a combination of state and federal taxes, including taxes paid by the employer and payroll taxes that are withheld from the employee. Is the Nanny Tax only for nannies? No! This tax applies to all domestic workers, including but not limited to housekeepers, cooks, butlers, domestic couples, and anyone else who makes $2,800 or more a year per individual. The government considers these employees ongoing household employees, not independent contractors. The Nanny Tax qualifies these employees for unemployment benefits (should anything happen), Social Security, and Medicare.
What steps are required to comply with (most states) Nanny Tax laws?:
1) The employer must create a tax account with the IRS and get an Employer Identification Number. This step includes having every employee fill out an I-9 form.
2) Withhold FICA taxes (Social Security & Medicare) from each paycheck- employers and employees share these expenses at a rate of 15.3% (7.65% each), so 7.65% will be withheld from the employee’s paycheck.
3) As each state requires, the employer must file unemployment insurance and income tax returns.
4) Provide employees a W-2 form by January 31st and file a W-2 copy A and W-3 with the Social Security Administration.
5) File a Schedule H form when they file their income taxes.
Hiring an employee can be a big step, and we recommend researching before you bring someone on board.
We understand that handling taxes and payroll on your own may be challenging, especially when you want to ensure you are doing everything by the book! Finding a third party to assist with your needs may be the solution for you. Our partners at Pavillion Agency offer payroll services so that they can do the heavy lifting for you. If you feel you may need help, feel free to reach out to us today.
Helpful Sources:
https://www.irs.gov/forms-pubs/about-publication-926