How Much Do Nanny Taxes Cost?

Family businesses who employ household workers such as nannies, gardeners,
housekeepers or personal assistants become employers and must pay employment
taxes – commonly known as “nanny taxes.”
These taxes include Social Security and Medicare premiums as well as federal
unemployment insurance coverage costs. Thankfully there are tax breaks that may
help offset some of these expenses.

Childcare

Typically, family employers should expect to pay approximately 10 percent of each
household employee’s gross salary as employer taxes (i.e. Social Security and
Medicare taxes, federal income withholding tax and state unemployment insurance
premiums). But many families also qualify for tax breaks which may reduce or offset
these employer taxes altogether.
Nanny taxes may seem complex and are constantly shifting with law changes.
Families should seek professional tax advice if they have questions regarding nanny
taxes.
Some families use a payroll service that specializes in domestic worker taxes to take
the guesswork out of managing and filing domestic worker paychecks and filing. If
this option suits your family’s needs, make sure that it obtains its own Employer
Identification Number (EIN), so as not to interfere with personal tax filings. There are
also several software solutions which do not provide payroll processing but instead
just handle domestic worker tax matters; they could prove less costly alternatives.

Household Duties

Families that hire domestic employees such as nannies are considered employers
and are required to abide by federal, state, and city tax, wage, and labor laws. Most
families pay about 9-12% of a nanny’s wages as employment taxes such as Social
Security & Medicare (FICA), unemployment benefits withholdings and income
withholdings – however these responsibilities can be minimized or even avoided
through pre-tax savings programs and credits like Dependent Care FSA or Child and
Dependent Care Tax Credit.
net pay refers to a nanny’s take-home pay after all withholdings and deductions
have been taken out, such as withholding taxes or FUTAP taxes (6% of first $7,000
gross wages payable in 2019); household employers also owe FUTAP taxes which
must be claimed via Schedule H when filing their federal taxes; depending on where
your family resides this may need to be done quarterly or annually with records kept
for tax audit purposes.

Employer Taxes

The IRS considers you an employer of anyone paid to perform work in your home,
such as nannies, house cleaners or gardeners. They must pay all applicable federal
and state employment taxes (sometimes known as “nanny taxes” ) that correspond
with these individuals’ duties – failing which could incur severe penalties against
both yourself and the employee involved.
Remitting household payroll and employment taxes quarterly is often best to avoid
underpayment penalties and help your nanny or household employee to receive her
salary more promptly.
After creating your business entity, the next step should be obtaining an Employer
Identification Number (EIN). This can be easily done online; an EIN is independent
from your Social Security number and appears on all tax forms that employees fill
out, helping prevent identity theft. Also inquire with potential employers whether
they provide Dependent Care Account (FCA) plans which could allow pre-tax wages
for household employees like your nanny.

Tax Credits

Families that pay their nanny through payroll may take advantage of flexible
spending accounts (FSAs) and possibly dependent care credits to reduce some tax
obligations for her wages. Unfortunately, making your household employee part of
your payroll increases its legal risks significantly by subjecting both parties involved
to potential legal disputes as well as potential employment tax liability issues.
Families may contribute funds toward their nanny’s health insurance premiums
without it counting as taxable income; however, they should keep a copy of her card
on file just in case an audit occurs.
Employers should be mindful of the complex tax, wage, and labor laws pertaining to
domestic employee hiring. Failing to abide by these rules could cost much more in
penalties, back taxes, and interest than simply paying your nanny “under the table.”
Nanny employment tax laws frequently change; therefore it would be advisable for
you to consult an accountant or bookkeeper in order to stay abreast of them and
ensure your family meets all current requirements.