If you employ a household worker, such as someone to watch young children, you may be liable for the so-called “nanny tax.”
Strategy: If you observe all the legalities, you can avoid any dire tax consequences. For many years, nanny tax obligations were ignored. However, several high-profile cases involving public figures resulted in greater IRS scrutiny.
Here’s the whole story: The tax law requires you to pay federal employment taxes if the wages paid to certain household employees exceed a specified annual threshold. The annual threshold for 2014 is $1,900 (up from $1,800 in 2013). Keeping that in mind, there are three major employment taxes to address.
- Social Security tax: The 6.2% Social Security tax is withheld from employees and matched by the employer up to the amount of the annual wage base. The wage base for 2014 is $117,000 (up from $113,700 in 2013). In addition, you must withhold and match the 1.45% Medicare tax on the full amount of wages.
- Federal unemployment taxes: You must pay a 6.2% tax on the first $7,000 in wages, but this amount is reduced by a credit of up to 5.4%. Thus, the net tax can be as little as 0.8% of wages.
- State unemployment and disability taxes: You are responsible for both your share and your employee’s share. If you don’t withhold the requisite tax amount, you must pay it.
Note: The nanny tax applies to a w ide variety of household employees, including nannies, babysitters, private nurses and other caretakers, cleaning people, yard workers and similar domestic workers. But a worker is an “employee” only if you control the working conditions. For instance, if you pay an agency directly, the agency is treated as the employer of the worker and owes the employment taxes.
Alternatively, if the worker controls how and when he or she performs the work and works for several households, he or she may be treated as a self-employed individual. This typically occurs when the worker offers services to the general public and provides his or her own tools and supplies. Self-employed individuals are responsible for the own employment taxes.
Finally, you’re not responsible for the nanny tax for amounts paid to:
- Your spouse
- Your child if he or she is under age 21
- Your parent (unless special conditions apply)
- An employee who is under age 18 at any time during the year, except if providing household services is the employee’s principal occupation.
Tip: If you’re unsure of your nanny tax obligations, contact your tax pro.