The 'Nanny Tax' isn't
limited to a nanny. It also applies to a housekeeper, maid, baby-sitter,
gardener or other household employee who isn't an independent contractor.
The tax doesn't apply to a household employee who's also a farm
If you employ someone who's subject to the 'Nanny Tax' you
aren't required to withhold federal income taxes. You have to withhold
only if your nanny asks you to and you agree to withhold. (In that case,
have the nanny fill out a Form W-4 and give it to you, so you can withhold
the correct amount.) However, you may be required to withhold social
security and Medicare tax (FICA). And you may also be required to pay (but
not withhold) federal unemployment (FUTA) tax.
FICA: You have to
withhold and pay FICA taxes if your nanny earns cash wages of $1,300 or
more (excluding the value of food and lodging) during calendar year 2001.
If you reach the $1,300 threshold, the entire wages (not just the excess)
will be subject to FICA. However, if your nanny is under age 18 and child
care isn't her principal occupation, you don't have to withhold FICA
taxes. Thus, if your nanny is really a student who is a part-time
baby-sitter, there's no FICA tax liability for her services. On the other
hand, if your nanny is under age 18 and the nanny job is her principal
occupation, you must withhold and pay FICA taxes.
withhold from the start if you expect to meet the $1,300 test; your nanny
won't appreciate a large, unexpected withholding from her pay later on. If
you aren't sure if the test will be met, you can still withhold from the
start. If it turns out the $1,300 isn't reached, just repay the withheld
amount. (If you make an error by not withholding enough, withhold
additional taxes from later payments.)
Both and employer and a
nanny have an obligation to pay FICA taxes. As an employer, you are
responsible for withholding your nanny's share of FICA. In addition, you
must pay a matching amount for your share of the taxes. The FICA tax is
divided between social security and Medicare. The social security tax rate
is 6.2% each for both an employer and a nanny for a total rate of 12.4%.
The Medicare tax is 1.45% each for both an employer and a nanny for a
total rate of 2.9%
Example: Assume you pay your nanny $300 a week.
You must withhold a total of $22.95, consisting of $18.60 for your nanny's
share of social security tax ($300 x 6.2%) and $4.35 ($300 x 1.45) for
your nanny's share of Medical tax. You would pay her a net of $277.05
($300 - $22.95). For your (employer's) portion, you must match the $22.95
(total taxes of $45.90).
Instead of withholding, you may prefer to
pay your nanny's share of social security and Medicare taxes from your own
funds. If you do pay your nanny's share of these taxes for her, your
payments aren't counted as additional cash wages for social security and
Medicare tax purposes. In other words, you don't have to compute tax on
the taxes. (But your payments of her taxes are treated as additional
income to the nanny for federal income tax purposes, so you would have to
include them as wages on the Form W-2 you provide, see below.) Thus, using
the figures from the above example, for each $300 wages, you would pay
your nanny the full $300 and also pay all of the total $45.90 in taxes
(i.e., both $22.95 FICA tax amounts.
FUTA: You also have an
obligation to pay (but not withhold) FUTA taxes if you pay a total of
$1,000 or more in cash wages (excluding the value of food and lodging) to
your nanny in any calendar quarter of the current year or last year. The
FUTA tax (at a maximum rate of 6.2%) applies to the first $7,000 of wages
paid. You pay the FUTA, not the nanny, so don't withhold FUTA from the
Reporting and paying: You must satisfy your 'Nanny
Tax' obligations by increasing your quarterly estimated tax payments or
increasing your withholding from your wages, rather than making an annual
As an employer of a nanny, you don't have to
file any of the normal employment tax returns, even if you're required to
withhold or pay tax (unless you own your own business, see below).
Instead, you just report the employment taxes on your tax return, Form
1040, Schedule H.
On your income tax return, you must include your
employer identification number (EIN) when you report the employment taxes
for your nanny. The EIN isn't the same number as your social security
number. If you already have an EIN from a previous nanny, you may use that
number. If you need an EIN, you must file Form SS-4 to get one. I've
enclosed a blank form you can use.
However, if you own a business
as a sole proprietor, you must include the taxes for your nanny on the
FICA and FUTA forms (Forms 940 and 941) that you file for your business.
And you use the EIN from your sole proprietorship to report the taxes for
You're also required to provide your nanny with a Form
W-2 by January 31, 2002 if her 2001 wages are subject to FICA or income
tax withholding. Additionally, you must file a Form W-2 with the Social
Security Administration by February 28, 2002. Your EIN must be included on
the Form W-2.
Record-keeping: Be sure to keep careful employment
records for each nanny and domestic employee. Keep the tax records for at
least four years from the later of the due date of the return or the date
when the tax was paid. Records should include: employee name, address,
social security number; dates of employment; dates and amount of wages
paid; dates and amounts of withheld FICA or income taxes; amount of FICA
taxes paid by you on behalf of your nanny; dates and amounts of any
deposits of FICA, FUTA or income taxes; and copies of all forms filed.