Occasionally we will read about a public figure not paying the nanny tax and the headaches it caused him or her professionally and personally. Ignoring the nanny tax and paying your employee “under the table” is never a good idea. For one thing, it is against the law. Second, it deprives your child care employee of several important benefits.
By completing the necessary paperwork and paying the required taxes for your nanny, you are enabling her to show proof of employment. This is key if your nanny wants to apply for a loan, show a work history to future employers, or obtain a credit card. Keeping your nanny “on the books” also gives her the ability to collect unemployment insurance when you no longer need her to watch your children, as well as Social Security and Medicare benefits once she retires.
According to the IRS, your nanny is considered a “household employee” since you control what work she does and how she does it. In addition to nannies, household employees can include housekeepers, maids, and gardeners.
The taxes you need to pay for your nanny are based on her income and include Social Security and Medicare as well as Federal Unemployment Tax (FUTA). You, as the employer, must pay an “employer’s share” of Social Security and Medicare as well as FUTA on your own tax return. You must also withhold Social Security and Medicare tax from her paycheck or you can pay both her share and yours. Be sure to keep a record — you’ll need it for her W-2.
The nanny taxes you pay are counted as part of your overall taxes owed. You may need to make quarterly estimated payments in order to avoid a penalty – your financial advisor can provide guidance.
The Necessary Paperwork
Before you withhold a dime of your nanny’s paycheck, you must file certain forms including:
- Form SS-4 (hard copy or online). Use this form to formally apply for an Employee Identification Number (EIN). This EIN is your ID number, as an employer, with the IRS.
- Forms W-2 and W-3. If you pay Social Security and Medicare wages of $1,800 or more, complete a W-2. Keep a copy, give one to your nanny and send a copy with the W-3 to the Social Security Administration.
- Form I-9. This form documents your nanny’s eligibility to work in the U.S. and her Social Security number.
- According to the IRS, you are not required to withhold Federal income tax from wages you pay to a household employee. You can, however, withhold the tax if she asks you to (and you agree). In this case, you will need to complete Form W-4, Employee’s Withholding Allowance Certificate. Your tax advisor can provide guidance as to whether you need to pay any state tax for your nanny.
Workers’ Compensation Insurance
Be sure that you obtain a workers’ compensation insurance policy to cover your nanny in the event of any accidents that may occur while she is working in your home. Workers’ comp is not covered by most regular homeowner’s insurance policies. Each state has its own requirements for workers’ compensation insurance, so be sure to check.
Although it sounds involved, once you know the rules and implement a system for withholding and paying your nanny’s taxes, the whole process should run smoothly. Your tax advisor can help you navigate the requirements and outline what you need to do and when. There are also online “nanny tax” services that can assist you — for a fee.