Learning how to pay nanny taxes yourself is perhaps the most complex part of employing your nanny.
There are a number of nanny taxes that you’ll need to pay for your nanny and the way in which you make those payments will depend on the state you live in. Because of this, we won’t cover specific information state-level here. Instead, we’ll focus on the types of federal taxes you’ll need to pay and the process you need to go through before you can make your first payment.
Don’t be intimidated! Learning how to pay nanny taxes yourself can seem scary but it does need to be an overwhelming task. There are many benefits to both you and your nanny in paying taxes and getting the process right the first time.
Who pays taxes for a nanny?
If you are going to pay your nanny taxes yourself, there are several different types of taxes that you’ll need to familiarize yourself with. As an employer, you yourself will need to pay several different taxes. Likewise, you will need to withhold a certain portion of your employee’s paycheck to cover her taxes. This is similar to how your own employer likely withholds taxes for you. We talk more about those specifics below. But the first thing to know is that there are two broad categories of taxes that you’ll need to pay:
Taxes paid by the employer: That’s you! This includes Social Security (OASDI), Medicare (also known as FICA), and state unemployment.
Taxes withheld on behalf of the employee: This includes Social Security and Medicare, plus federal and possibly state income taxes.
Who is considered a household employee?
You may be thinking, “can’t I just treat my nanny as an independent contractor?” It certainly seems like the easiest way to employ your nanny is to have them control their own tax payments.
Certainly, this question has been asked by many parents over the years. The answer is a resounding NO. The IRS makes clear that a household employee that is employed by someone who dictates when, what, and how their work is done cannot be considered an independent contractor.
Specifically, if you pay your nanny more than $2100 a year, they are considered a household employee and you are required to pay taxes for them.
While that can seem like a bummer, it protects both you and your nanny in the long-run. Remember that nannies who take their job seriously will want to pay taxes. This is because this is their career and it will impact their long-term financial stability, including their retirement Social Security.
Nannies who are willing to be paid “under the table” so to speak can be less committed to their jobs. This might be a red flag if you are planning on hiring someone who you want to be with you for years.
What nanny taxes do I need to know about?
There are several different types of nanny taxes you’ll need to be paying as part of employing your nanny. Below are a few required taxes. Be aware that the taxes you pay at the state or local level will vary depending on your location. Consult your state’s department of revenue site to learn more about the specifics related to nanny employment in your state.
Social Security: In 2023, Social Security tax comes to a rate of 12.4%. The employer and employee each pay half of this, so 6.2%. This tax is paid on the first $147,000 of income. That means that any income above that amount is not subject to the tax. So 6.2% of your nanny’s wages are withheld by you to pay for their portion of the tax. Then you also pay an additional 6.2% on top of that as your employer tax.
FICA (Medicare): FICA, which is used to pay for Medicare, is administered in the same way as Social Security. The FICA tax rate in 2020 is 7.65%. Like Social Security, you withhold that amount for your nanny’s wages and then pay another 7.65% for your employer portion of the tax.
Federal income tax: You are not required to withhold federal income tax from your nanny’s wage. Discuss with your nanny how you will handle this tax. If you do decide to withhold federal income tax, you will need to complete a Schedule H when you complete your yearly income filing.
State income tax: State tax rates for household employees will vary from state to state. Similarly to federal income tax you are not required to withhold state taxes from your nanny’s wages. Work with your nanny to decide how you will handle state tax payments. Note that if you do decide to withhold state taxes you may need to complete additional forms during yearly tax season.
Unemployment insurance: A common state tax is for Unemployment Insurance (UI). This is a tax that covers your nanny in the case of job loss. Like other state taxes, the tax rate and process to pay it will vary from state to state. Consult your state’s tax website to learn more information about your state. Many states have online portals that allow you to pay your taxes quickly online.
What do I need to do to get started?
Getting started on paying your nanny’s taxes can seem like a daunting task. There are a few main steps you’ll need to take before you are able to pay your nanny’s wages with the appropriate taxes withheld for the first time.
Step 1: Establish a federal tax ID.
To pay taxes on your nanny’s wages you will need to get a federal tax ID, also known as an EIN. EIN stands for Employee Identification Number. It is a nine-digit number that allows you to pay federal Social Security and Medicare Taxes.
You can request an EIN by going to the IRS website and completing an application online. Following the submission of your application it will be reviewed and you will be provided with your number assuming your application is approved.
Your EIN will be an essential part of paying your nanny’s taxes. You will use it frequently when paying both federal AND state employer taxes.
Step 2: Nanny completes an I-9 form for work eligibility.
An I-9 form establishes your nanny’s eligibility to work in the U.S. It is a form that is completed both by you and by your nanny. Your nanny will provide information about themselves including whether they are a citizen, non-citizen national, lawful permanent resident, or alien authorized to work.
In your section of the form, you will include information from the nanny’s identification, like a driver’s license or passport.
After you’ve both signed the form, you’ll keep a copy on record. You do not need to submit the form and there is no filing fee.
Step 3: Issue a W-2
At the end of the calendar year, you will need to issue your nanny a W-2. The W-2 is due to your nanny by January 31 of the next calendar year. You will also need to submit a copy to the IRS. The W-2 outlines the wages and taxes that were paid for the nanny during the year. It will allow your nanny to complete her own tax filing for the previous year.
Step 4: Pay federal taxes
When you complete your own personal yearly taxes that is when you will pay any relevant federal employment taxes for your nanny. You will complete a Schedule H outlining these taxes. The amount you owe will vary based on how much your nanny was paid in wages over the year.
Your first bill for federal nanny taxes will likely hurt! It will seem like a lot of money. If you don’t want to pay your federal nanny taxes once per year, you can look into paying quarterly estimated taxes. This will allow you to break up your total payment into four smaller installments.
Step 5: Pay state taxes
State taxes, like unemployment insurance (UI), will vary from state to state. Consult your state’s tax website to learn more about the requirement for your location. Note however that many states require that UI payments be made quarterly.
This means that you can not leave payment of these taxes to once per year the way you can with federal taxes. Thus it is very important to educate yourself about what is required in your state so that you are not penalized by missing a payment.
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