If you employ household workers, which may include housekeepers, nannies, babysitters, gardeners, cooks, health care workers and other employees it is important to understand your tax obligations, commonly referred to as “nanny taxes.”
What types of workers are covered?
Simply working in your home does not necessarily classify someone as a household employee. You are not required to withhold or pay employer taxes for workers classified as independent contractors, such as occasional babysitters or housekeepers who work for many different families.
However the rules for distinguishing between employees (who trigger nanny tax obligations) and independent contractors (who don’t) are complicated, So be sure to consult your tax advisor if you are uncertain.
What types of taxes must be paid and how much?
Nanny taxes include the following:
Income Tax Withholding. You are not required to withhold federal income taxes (or, usually, state income taxes) from a household employee’s earnings, unless the employee requests you to and you agree. In which case, you will need to have the employee complete Form W-4 and you will need to withhold income taxes on the employee’s wages.
FICA taxes. You are required to withhold and pay FICA taxes (Social Security and Medicare) if your household employee’s wages reach a specified threshold ($2,400 for 2022). If you meet this threshold, you must pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) on the employee’s cash wages. In addition, you are responsible for withholding the employee’s share of these taxes (also 6.2% and 1.45%, respectively). There is an exception to FICA tax obligations for wages paid to certain family members or household employees under the age of 18 and their work for you is not their principal occupation.
Unemployment taxes. You are required to pay federal unemployment tax (FUTA) if you pay total cash wages to household employees (other than certain family members) of $1,000 or more in any quarter in the current or preceding calendar year. The tax applies to the first $7,000 of an employee’s cash wages at a 6% rate, although credits reduce that rate to 0.6% in most cases.
State and local taxes. Depending on your state and local jurisdiction there may be additional employment related taxes for your household employee.
How are the taxes reported and paid?
Typically, you do not need to file quarterly employment tax returns for household employees. Instead, you report household employment taxes on Schedule H of your personal income tax return.
Despite filing Schedule H annually with your personal income tax return, you are still required to remit the taxes throughout the year, either through quarterly estimated tax payments or by increasing your withholdings from your wages. Otherwise, you will have to pay the tax when you file your return and you could be subjected to penalties for underpayment of estimated tax.
You will also need to file Form W-2 for your household employees if you are required to withhold FICA taxes or agree to withhold income taxes for a household employee.
Have we lost you with all of these requirements? Fortunately, we deal with household employee tax requirements all of the time. If you have any questions, please contact your ClarkSilva team member.