What Is a Nanny Tax?
Let me explain what a nanny tax really is. It's a federal tax you have to pay if you employ household workers and their wages exceed a specific threshold. For 2021, if you're paying cash wages of $2,300 or more per employee, you need to withhold Social Security and Medicare taxes at 15.3%, with you and the employee each covering 7.65%. Additionally, if cash wages hit $1,000 or more per quarter per employee, you're on the hook for a 6% unemployment tax on up to $7,000 annually.
Understanding the Nanny Tax
You need to understand that household employees are people whose work you control, like nannies, babysitters, butlers, or cooks. The IRS treats these ongoing helpers as your employees, not independent contractors, so you're responsible for Social Security, Medicare, and unemployment taxes—both federal and possibly state-level ones. Check IRS Publication 926 for the full details on federal and state requirements.
For instance, if you pay a babysitter $50 every weekend, that adds up to $2,600 over 52 weeks, meaning you owe nanny taxes. But this doesn't apply if the babysitter is your parent, spouse, or under 18 and not primarily in household work. If you hire through an agency, they're the employer and handle the taxes.
Benefits of the Nanny Tax
Paying the nanny tax gives your household employee access to key benefits like Social Security, Medicare, and unemployment protections. It also provides them with verifiable income and a legal work history, which helps when they apply for credit, loans, or mortgages. On your end, you can save significantly through a Flexible Spending Account or the Child and Dependent Care Credit.
Key Takeaways
- A nanny tax is a federally required tax paid by people who employ household employees and pay wages over a certain threshold.
- The IRS deems an ongoing household helper as a household employee, rather than an independent contractor.
- The nanny tax qualifies household employees to receive certain benefits and protections, such as Social Security, Medicare, and unemployment benefits.
- Employers and employees pay an equal share of social security and Medicare taxes (7.65% total) on cash wages.
Nanny Tax Requirements
If you have household employees, you must file to become an employer and get an employer identification number for IRS dealings. Failing to pay these taxes can lead to penalties, and misclassifying an employee as a contractor could result in tax evasion charges.
In 2021, Social Security withholding is 6.2%, Medicare is 1.45%, totaling 7.65% from wages—split between you and the employee, though some employers cover the full 15.3%. If you're hiring help and find the tax rules complex, consider nanny payroll services to automate the process and stay compliant.
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