Did You Hire a Nanny This Year Due to COVID-19? You May Owe “Nanny Tax”
Many parents are hiring nannies and babysitters because their daycare centers and summer camps are closed this year due to COVID-19. This may result in federal “nanny tax” obligations.
Be aware, the nanny tax may apply to all household workers, such as housekeepers, babysitters, gardeners or others who aren’t independent contractors.
You aren’t required to withhold federal income taxes from the individual’s pay if you employ someone who’s subject to the nanny tax. You only need to withhold if the worker asks you to and you agree. (If you do, ask the nanny to fill out a Form W-4.) You may also have other withholding and payment obligations.
Withholding FICA and FUTA
If your nanny earns cash wages of $2,200 or more (excluding food and lodging) during 2020, you must withhold and pay Social Security and Medicare taxes (FICA). If you reach the threshold, all of the wages are subject to FICA, not just the excess wages.
If your nanny is under 18 and childcare isn’t his or her principal occupation, such as a student or part-time babysitter, you don’t have to withhold FICA taxes.
Both employers and household workers have an obligation to pay FICA taxes. Employers are responsible for withholding the worker’s share of FICA and must pay a matching employer amount. Alternatively, you can pay your nanny’s share of Social Security and Medicare taxes instead of withholding it from pay.
FICA tax is divided between Social Security and Medicare. Social Security tax is 6.2% for the both the employer and the worker, totaling 12.4%. Medicare tax is 1.45% each for both the employer and the worker (2.9% total).
It’s unclear how these taxes will be affected by the executive order that President Trump signed on August 8, which allows payroll taxes to be deferred from September 1 through December 31, 2020.
You also must pay federal unemployment (FUTA) tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter of 2020 or 2019. FUTA tax applies to the first $7,000 of wages. The maximum FUTA tax rate is 6%, but credits reduce it to 0.6% in most cases. FUTA tax is paid only by the employer.
Reporting and paying nanny tax
To pay nanny tax, you increase your quarterly estimated tax payments or increase withholding from your wages, rather than making an annual lump-sum payment.
You don’t have to file any employment tax returns, even if you’re required to withhold or pay tax (unless you own a business). Instead, you report employment taxes on Schedule H of your tax return.
You need to include your employer identification number (EIN) when reporting employment taxes on your return. The EIN isn’t the same as your Social Security number. To obtain an EIN, you must file Form SS-4.
If you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that you file for your business as well as use the EIN from your sole proprietorship to report the taxes. You also must provide your nanny with a Form W-2.
Keeping tax records
Maintain careful tax records for each household employee. Keep them for at least four years from the later of the due date of the return or the date the tax was paid. Records should include:
- employee’s name
- employee’s address
- employee’s Social Security number
- employment dates wages paid
- withheld FICA or income taxes
- FICA taxes paid by you for your worker
- copies of forms filed
If you need help or have questions about how to comply with these requirements, contact us today.
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