The Nanny Tax applies to more than just Nannies

Chances are, you’ve heard about the “nanny tax.” Most people believe that the nanny tax applies only to those individuals employed by a family to care for their children. Not so, says the Wisconsin Institute of CPAs. The nanny tax refers to the federal employment taxes – Social Security and Medicare – and federal unemployment tax that employers of all types of household workers must pay if the employee’s wages exceed a threshold amount ($1,500 for 2007).

Who are household employees?

Housekeepers, maids, babysitters, health aides, private nurses, caretakers, gardeners, private drivers, and others who work around your private residence are all examples of household employees. For tax purposes, a worker is considered to be your employee if you control not only what work is done, but how it is done. It doesn’t matter if the work is full-time or part-time, if you pay your worker by the hour, week, or project, or if you hired the worker through an agency or on your own. If a worker is your employee (and not any agency’s, for example), you are required to pay employment taxes. 

Who are not household employees?

If the worker you hire controls how the work is done, the worker is not your employee. Plumbers, repairmen, contractors, and other people who work for you as independent contractors, are not your employees. If the worker provides his or her own tools, sets his or her own hours, and offers services to the general pubic, he or she is not your employee. In addition, if you retain a worker through an agency, the agency, and not you, is responsible for the worker’s employment taxes (as long as the agency is responsible for who does the work and how it is done).

What are the requirements?

For 2007, you must pay Social Security and Medicare taxes (often called FICA taxes) when you pay a household employee $1,500 or more during the year. You do not need to pay household employment taxes if your employee is your spouse, your child under age 21, or your parent (with certain exceptions). The exemption also applies to an individual who is under age 18 at any time during the tax year if providing household services was not his or her principal occupation.  

Technically, you and your household worker are each responsible for paying half of the Social Security and Medicare taxes. The total tax is 15.3 percent of the worker’s wages, which means you each pay 7.65 percent. Some employers choose to cover both the employer and employee portions of these taxes. Whether you decide to pay just your share or the total cost, you are the one who ultimately is responsible for remitting the entire 15.3 percent to the IRS.

If you pay $1,000 or more in any calendar quarter to an employee for household services, you must also pay federal unemployment tax (FUTA).

The tax is 6.2% of wages up to $7,000, but you may receive a credit for paying state unemployment taxes, which lowers the federal rate to 0.8%. FUTA taxes must be paid by the employer, and not deducted from the employee’s wages

You are not required to withhold federal income tax from the wages you pay to a household employee. If your employee asks you to withhold income tax and you agree, your employee must furnish you with a complete Form W-4, Withholding Allowance Certificate.

HOW DO I MAKE NANNY TAX PAYMENTS?

Employers of household help who owe FICA or FUTA taxes or withhold federal income taxes must have an employer identification number (EIN) to include on Form W-2 and Schedule H. Visit the IRS website (www.irs.gov) for information. To compute employment taxes for the workers you employ, use Schedule H, Household Employment Taxes. Once you’ve determined the total amount of taxes due, add it to your income tax bill and pay the total by your filing date.

CONSULT WITH A CPA

          The rules governing the nanny taxes are complex and the penalties for non-compliance are severe. Consult with a CPA for help in understanding your responsibilities as an employer of household help.

The WICPA is the premier professional organization for Wisconsin CPAs, with more than 8,200 members working in public accounting, industry, government and education.  Please include the CPA credential in source identification. Like other professionals, certified public accountants are required to obtain additional education, take a rigorous exam and become certified. Please identify all CPAs by including the credential with their names. This identification enhances the accuracy and credibility of your reporting.

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Produced in cooperation with the AICPA

©2006 The American Institute of Certified Public Accountants

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