As the kids go back to school, you may decide to hire a nanny (or after school baby sitter). Or, when the busy fall season kicks in, you may hire someone to do help with housekeeping. Do you know about the nanny tax?
You need to pay taxes if your pay to any household help exceeds certain IRS thresholds.
For the year 2016, the “nanny tax” threshold is $2,000. If you pay anyone you directly employ $2,000 or more, you must pay both Social Security and Medicare taxes (also called FICA coverage). You must also include in that $2,000 any cash you pay employees for transportation, meals and housing.
For this year, these tax rates are 6.2% for Social Security and 1.45% for Medicare.
Unless household employment is the worker’s primary occupation, you do not need to pay Social Security taxes for baby sitters or other workers younger than age 18.
Who qualifies as an “employee?”
The IRS will consider an individual an “employee” if your situation meets the following two criteria.
First Criteria: You hired the individual to work around your home. Examples of household employees include:
- Babysitters and Nannies
- Domestic workers,
- Health aides and private nurses
- Housekeepers and maids, and
- Yard workers or gardeners.
Second Criteria: You control what work the individual does and how she does it. This requirement applies to both part time and full time work, even if you hired the worker through an agency.
Who is not an employee?
If workers controls how they complete the work, they are not an employee but are self-employed. Self-employed workers typically provide their own tools and offer services to the general public in an independent business.
A worker who performs child care services for you in his or her home generally isn’t your employee. Also, if a third-party controls the work the workers do and how they do it (a cleaning service for example), those workers are not your employees.
If you hire an individual, who comes to your home to care for your child or to do housekeeping and you provide instructions and the equipment, that individual is your employee.
Can the individual work legally in the USA?
It is unlawful to hire an individual to work for you who cannot legally work in the United States.
According to the IRS:
“When you hire a household employee to work for you on a regular basis, you and the employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. No later than the first day of work, the employee must complete the employee section of the form by providing certain required information and attesting to his or her current work eligibility status in the United States.
You must complete the employer section by examining documents presented by the employee as evidence of his or her identity and employment eligibility. The IRS provides acceptable documents to establish identity and employment eligibility on Form I-9.”
The IRS provides information on Form I-9, at this link:
You should keep the completed Form I-9 in your own records. You should not submit it to the IRS, or any other government or other entity. If an authorized government official requests to see your I-9 form, you must have it available for their review.
How do you file the taxes?
You can make payments in several ways. You can:
- Pay these taxes, when you file your 2016 federal income tax return in 2017, by attaching Schedule H to your 1040. On Schedule H, you calculate your total household employment taxes and add these taxes to your income tax. You must pay the amount due by April 18, 2017.
- Ask your employer to withhold more federal income tax from your wages to cover your “nanny tax” payments.
- Make estimated tax payments for 2016 to the IRS each quarter. You file form 1040-ES to do this. You can find information on that form at this link: https://www.irs.gov/pub/irs-pdf/f1040es.pdf
A word of caution: You may be subject to the estimated tax underpayment penalty if you didn’t pay enough income and household employment taxes during the year.
You may also need to pay unemployment taxes. If you pay an employee more than $1,000 in any quarter of the year, you must pay federal and state unemployment taxes. This tax requirement continues even if your employee’s wages drop below $1,000 in subsequent quarters. Filings vary by state but are usually quarterly.
If you have any questions about your taxes, please contact us.