The Nanny Tax

Posted by: Stephen Moss

Nanny Tax - Delaware CPA FirmHave you hired a household employee? If so, what are your responsibilities for that employee? If you’ve hired anyone to do work in or around your home and you control how the work is done, then you have a household employee. It doesn’t matter if they are full time or part time, or whether you pay them hourly, daily, weekly or by the job. Any of the following are household employees: babysitters, caretakers, cleaning people, domestic workers, drivers, health aides, housekeepers, maids, nannies, private nurses and yard workers. If, however, they control how they do the work, use their own supplies and equipment and offer their services to the general public, such as a maid service or a landscaper, then they are not your household employees.

If you paid your household employee $1,900 or more for the year in 2014, then you must withhold Social Security tax at 6.2% and Medicare tax at 1.45% from your employee’s wages. The combined total is 7.65% and is referred to as FICA tax. As the employer, you must match this amount. You are not required to withhold federal and state income taxes from your employee’s pay; however if he or she request it you may withhold them. \If you pay your employee more than $1,000 in any quarter then you must also pay federal unemployment (FUTA) tax at 0.6% on the first $7,000 of your employee’s wages.

Social Security, Medicare, any federal withholding and the FUTA tax are reported on Schedule H, which is filed and paid with your Form 1040. While you only pay the taxes at year end, they are added to your income tax liability and may create an underpayment penalty, so quarterly estimated tax payments may be required. You must also provide your employee with a W-2 Form and file a W-3 and copy A of Form W-2 with the Social Security Administration.

State Unemployment tax laws vary by state, for instance, Delaware requires quarterly filings and the range base is $18,500. You should familiarize yourself with the rules in your home state.

It’s been estimated that as many as 80% of household employees are paid cash under the table or issued a Form 1099 as an independent contractor. Why should you file and pay these taxes? Due to the rate of noncompliance, this is an area the IRS is cracking down on. How can you get caught? You’ve paid your nanny for 14 years and now your children are old enough to care for themselves and old enough to help with housework. So you let your nanny go and she goes to the Department of Labor and files for unemployment. They have no record of her employment and now the state or IRS comes to you. You owe 14 years of back taxes plus penalties and interest.

While steep penalties should be enough to make employers comply, they should also consider their responsibility to their employees. Being paid legally means your employee will have Social Security and Medicare coverage upon retirement, unemployment benefits if they lose their job due to no fault of their own, verifiable employment history for obtaining auto and home mortgage loans, and reduced health care costs via subsidies provided through the Affordable Care Act. Have questions? For additional information visit our website or contact our Tax and Small Business Team.

Photo by: Chris Moseley (License)

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