In reality, there is no such thing as a ‘nanny tax’. There are no unique taxes that apply only to nannies. However, the term nanny tax does refer to some real taxes that employers of nannies do need to pay, just like employers of other types of workers are responsible for paying their share of employment taxes. For a detailed breakdown you can look at IRS Publication 926 as it is the Household Employer’s Tax Guide.
The term nanny tax originated because of well-known nanny employers who had not paid in the appropriate taxes. The employment tax rules are a bit different for household employees (which is the classification that a nanny fits into), than they are for other employees, so it can be confusing.
The first item that you need to consider when deciding whether or not you may owe ‘nanny tax’ is how much money you paid for in-home daycare during the year. For 2011, $1,700.00 is the magic number. If you paid more than this amount for in-home daycare during the year, then you are required to report and pay employment taxes on the wages paid to that in-home provider.
There are exceptions to this rule, of course. Most family members: spouse, parents, or a child under twenty-one would be exempt. Also, anyone under 18 years old, who is not working as a nanny as their primary occupation, such as a high school student, would be excluded.
And what are these ‘nanny taxes’? They are the same taxes all employers must pay into the U.S. government. FICA is the main one. This is made up of two parts, social security taxes and medicare taxes. Together, they total 7.65% of the nanny’s wages, which you, as the employer, are responsible for paying. The other federal tax is referred to as FUTA. It is the Federal Unemployment Tax. This tax is paid on only the first $7,000.00 in wages paid during the year and is calculated at .08%. State unemployment taxes may apply, also. Each employer should check on the filing requirements within their own state for these rates and limts.
In addition to these ‘employer taxes’, the nanny will also be responsible for her share of the FICA taxes, which are at a reduced rate for 2011, but will be a matching 7.65% in 2012. She is also responsible for her own income tax payments, unless you have agreed to withhold these and deposit the payments for her.
For the normal homeowner, all of this can be quite confusing. Working with a nanny agency can be helpful, as they are quite familiar with the process and your options. Consulting with your tax profession prior to hiring your first nanny is also recommended. To take the burden totally off your shoulders, there are several payroll services available that will handle your nanny’s payroll for you and make sure that you are in full compliance. There is also payroll software, such as Nanny Pay that help you with the process.