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Sweep away ‘nanny tax’ issues

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in Small Business Tax

If you employ a household worker, you might be liable for the so-called “nanny tax.”

Strategy: Observe the strict letter of the law. Depending on your situation, you may be pleasantly surprised to learn the tax doesn’t apply to you. On the other hand, some high-profile individuals have been caught napping on this often-misunderstood tax obligation.

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 2017 is $2,000 (the same as it was in 2016). Keeping that in mind, there are three major employment tax issues to address.

1. Social Security taxes: The 6.2% Social Security tax portion of the federal employment tax is withheld from employee paychecks and matched by the employer up to the amount of the annual wage ceiling. The ceiling for 2017 is $127,200 (up from $118,500 in 2016). In addition, you must withhold and match the 1.45% Medicare tax portion of the federal employment tax, which hits all wages up to infinity.

2. Federal unemployment taxes: You must pay a 6.2% tax on the first $7,000 in wages, but this amount is usually reduced by a 5.4% credit. Thus, the net tax is only 0.8% if you paid all your required state unemployment and disability taxes.

3. State unemployment and disability taxes: You are responsible for both your share and your employee’s share of these state taxes. If you don’t withhold the requisite amount of tax from the household employee’s wages, you must pay it yourself.

Note: The nanny tax applies to a variety of household employees, but workers are “employees” only if you control the working conditions.

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 certain special conditions apply) or
  • 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.

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