Do you have a household employee like a nanny, caregiver for an elderly relative who moved in with you, or a live-in housekeeper? You may have hired somebody to help out during difficult circumstances caused by the pandemic. Maybe that has turned into a permanent arrangement.
In these scenarios, the dreaded Nanny Tax issue may be in play for work done in the recent past or for work still being done.
The Nanny Tax refers to your duty to withhold and deposit a household employee’s share of Social Security and Medicare taxes on wages paid to the employee and also deposit the employer’s share of those taxes. The employee and employer shares of Social Security and Medicare taxes are collectively referred to as the FICA tax.
You may also owe the federal unemployment tax (FUTA) on wages paid to a household employee.
Finally, you may be required to withhold and deposit state income tax on wages paid to a household employee, and you may have to pay for state unemployment insurance too.
Here in FAQ format is what you need to know about the federal tax issues for household employees. For any state stuff, you’ll need to contact your friendly neighborhood payroll tax service or tax pro.
Failing to comply with nanny tax rules can result in fines and other problems, such as not being protected in the event of a worker’s compensation claim if your household employee is injured on the job.
Do you actually have a household employee?
Good question. The Nanny Tax issues covered here only apply if a household worker is actually your employee — as opposed to an independent contractor — under the federal tax rules.
Household work defined
First of all, let’s clarify who can potentially count as a household employee. According to IRS Publication 926 (Household Employer’s Tax Guide), household employees do household work — such as performing as a babysitter, butler, caretaker, cook, driver, health aide, housekeeper, maid, nanny, or private nurse. Household work only includes performing services in or around your private home.
Services performed in your home that are not of a household nature, such as those provided by a private secretary, personal assistant who does not perform household chores, tutor, or librarian aren’t considered household work. However, an individual who provides these types of services may be a garden-variety employee as opposed to a household employee.
The basic tax rules for garden-variety employees are similar to those for household employees, but there are different compliance requirements. Consult a tax pro if you have questions.
Household employee defined
According to IRS Publication 926, a person who does household work for you is your employee if you control not only what work is done but also how the work is done. So, if a worker regularly comes to your home on a schedule dictated by you and is supervised by you, the worker is probably an employee. It doesn’t matter whether the work is full-time or part-time or if you hired the worker through an agency. However, if an agency supplies the worker and controls what work is done and how it’s done, the worker is not your employee.
Yard care workers, pool service guys, maids and the like who provide services to the general public and just show up at your place periodically to go about their business are not your employees.
If I have a household employee, what are my FICA tax obligations?
For 2021, the FICA tax issue arises if you pay a household employee $2,300 or more during the year. If you cross that threshold, the Social Security tax rate is 12.4% on all cash wages up to $142,800. You withhold 6.2% from the employee’s wages and pay the other 6.2% out of your own pocket as the employer. The Medicare tax rate is 2.9% on all cash wages. You withhold 1.45% from the employee’s wages and pay the other 1.45% out of your own pocket as the employer.
Finally, you must withhold the 0.9% Additional Medicare Tax on wages paid to a household employee in excess of $200,000 and deposit that tax with the Feds. But you won’t need to worry about that unless you’re one of the greatest household employers of all time.
Exception: The FICA tax does not hit wages paid to a household employee who is under age 18 at any time during the year — unless providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be a principal occupation, so no FICA tax concerns in that case.
What are my FUTA obligations?
For 2021, you owe FUTA if you pay cash wages of $1,000 or more to a household employee during any calendar quarter this year or if you did so during any calendar quarter in 2020. The FUTA equals 6% on the first $7,000 of cash wages paid during the year. Wages above $7,000 are not hit with the FUTA. While the FUTA rate is generally 6%, you may be able to claim a credit of up to 5.4% against your FUTA liability.
What is my FIT withholding obligation?
Thankfully, you’re not required to withhold FIT from wages paid to a household employee — unless the employee asks you to do so, and you agree. In that case, the employee must give you a completed IRS Form W-4 (Employee’s Withholding Certificate) to allow you to calculate withholding amounts according to the table found in IRS Publication 15-T (Federal Income Tax Withholding Methods).
What about non-cash wages?
For FIT purposes (including FIT withholding from a household employee’s wages and wages reported on the employee’s Form W-2), taxable wages generally include both cash and non-cash wages. Measure the value of any non-cash wages based on the fair market value of what is provided. However, the following non-cash forms of compensation don’t count as taxable wages:
- Meals provided to the household employee at your home for your convenience.
- Lodging provided to the household employee at your home for your convenience and as a condition of employment.
- For 2021, up to $270 per month for transit passes so your household employee can commute to your home. See IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits) for details.
- For 2021, up to $270 a month to reimburse your household employee for parking at or near your home or at or near a location from which the employee commutes to your home. See IRS Publication 15-B for details.
Key point: Non-cash wages are not subject to FICA tax or FUTA according to IRS Publication 926.
How do I comply with the Nanny Tax rules?
It’s a pain. First, you’ll need to obtain a federal employer ID number (EIN) for FICA tax withholding and deposit purposes, FUTA payment purposes, and FIT withholding and deposit purposes. Your household employee will need a tax ID number (TIN), which can be the employee’s Social Security number if the employee has one. You can obtain your EIN from the IRS and, if applicable, use that number to obtain a state identification number from the appropriate state tax agency, if applicable.
Key point: You can apply for your federal EIN online here. Or you can submit a paper IRS Form SS-4 (Application for Employer Identification Number).
You must provide your household employee with a Form W-2 to report taxable wages paid during the year. The due date is January 31 of the following year. Your employee then uses the Form W-2 to file his or her Form 1040. You must send the IRS a copy of Form W-2.
The Social Security Administration (SSA) requires you to file an annual Form W-3 (Transmittal of Wage and Tax Statements) and an annual Copy A of Form W-2. Filing these forms notifies the SSA that you’ve withheld and paid FICA tax on your household employee’s wages.
Finally, file Schedule H (Household Employment Taxes) with your Form 1040. Use Schedule H to calculate your total household employment taxes (FICA tax, FUTA, and FIT withheld from the employee’s wages, if applicable). Report the total household employment taxes on Schedule 2 (Additional Taxes) of Form 1040. The employment taxes are then carried from Schedule 2 to Line 23 of Form 1040 as an addition to your federal income tax liability.
For the 2021 tax year, pay the amount due by 4/15/22. To avoid an interest charge penalty, you can pay these taxes in advance via quarterly federal estimated tax payments. Submit the quarterly payments with IRS Form 1040-ES (Estimated Tax for Individuals). For the 2021 tax year, estimated tax payments are due on 4/15, 6/15, 9/15, and 1/18 of next year.
Key point: As noted earlier, you may also be required to withhold state income tax from your household employee’s wages and pay for state unemployment insurance.
What if I don’t withhold FICA tax?
You have the option of paying your household employee’s share of FICA tax out of your own pocket instead of withholding it from the employee’s wages. If you choose that route (as many folks do), increase the wages reported for federal income tax purposes on the employee’s Form W-2 by the amount you pay for the employee’s share of FICA tax. Then follow the rest of the drill explained above.
Can I claim the child and dependent care credit based on a nanny’s wages?
Maybe. If you have one or more qualifying individuals under your wing, you may be eligible for the child and dependent care credit (CDCC). The credit covers eligible expenses that you pay to care for one or more qualifying individuals so you can work, or if you’re married, so both you and your spouse can work.
Qualifying individuals are defined as your under-age-13 child, stepchild, foster child, brother or sister, step-sibling, or a descendant of any of these individuals such as a grandchild. The individual must live in your home for over half the year, and must not provide over half of his or her own support. A disabled spouse or disabled dependent who lives with you for over half the year can also be a qualifying individual.
Subject to dollar limitations, eligible expenses include wages paid to a nanny or other household employee who takes care of a qualifying individual so you can work.
For details, see my earlier column here.
The bottom line
As you can see, the Nanny Tax rules are pretty complicated, and complying with them can be a time-consuming nuisance. Nobody will blame you if you hire a payroll service or tax pro to take care of this stuff. It would be money well-spent.