What Is a Nanny Tax?
A nanny tax is a federal tax that must be paid by people who hire household help, such as a babysitter, maid, or home health aide, and pay them more than a specified threshold amount during the tax year.
Understanding the Nanny Tax
The nanny tax exists because the IRS considers an ongoing household helper to be the taxpayer's household employee, rather than an independent contractor. As such, the taxpayer becomes an employer and must pay Social Security, Medicare and federal and state unemployment taxes on the wages paid to that employee. There may be state-level nanny taxes as well. The federal and state nanny tax requirements are detailed in IRS Publication 926.
For example, if a taxpayer pays an adult babysitter $50 every weekend, they must pay nanny taxes. The nanny tax does not apply if the babysitter is the taxpayer's parent, spouse, or if the babysitter is under the age of 18 and is not primarily engaged in the household employment profession. Nanny taxes also aren’t applicable if a taxpayer hires household help through an employment agency, in which case the agency is considered the employer and is responsible for paying the nanny tax.
The nanny tax enables a household employee to receive the benefits and protections of being paid legally, such as Social Security, Medicare, and unemployment benefits. It also provides a household employee with verifiable income and legal employment history, which can be important when applying for a credit card, loan, or mortgage. The nanny tax also allows an employer to take advantage of significant tax savings from a Flexible Spending Account and the Child and Dependent Care Credit.
Nanny Tax Requirements
Taxpayers with household employees must file to become an employer and receive an employer identification number for dealing with the IRS and other agencies. For the 2018 tax year, the nanny tax must be paid when a taxpayer pays a household employee more than $2,100 or more in a calendar year or over $1,000 in a quarter. Failure to pay employment taxes can result in penalties and interest that will cost a taxpayer an average of $25,000 and families who misclassify a household employee as an independent contractor can be charged with tax evasion.
In 2018, the withholding amount for Social Security taxes was set at 6.2% and the rate for Medicare taxes is 1.45%, which amounts to a total of 7.65% withheld from all cash wages. The employer also must match that 7.65% out of their own pocket for Social Security and Medicare, and some employers may choose to pay the total 15.25% withholding themselves.