Nanny Tax
Candlefocus EditorThe nanny tax is a federally required tax that parents, guardians, or anyone who employs in-home childcare or domestic workers must pay when wages reach a certain threshold. It is important to understand that a nanny tax is required even if the caretaker is not a traditional nanny - they just have to be providing childcare services in the home the person who pays them.
While it may seem like an extra burden, the nanny tax helps protect the employee and ensures that they receive the same benefits, such as Social Security, Medicare, and unemployment, that all other employees receive. In other words, they are considered a household employee, not an independent contractor. And those who provide household services are subject to the same payroll taxes that other employees must pay.
In the United States, employers and employees must pay an equal share of Social Security and Medicare taxes (7.65% total) on the cash wages that are issued by the employer. These wages are submitted to the Internal Revenue Service (IRS) for calculation of the appropriate taxes. The employer may also be responsible for paying part of the employee’s federal and state income taxes, and may choose to pay for the cost of health insurance for the employee.
To calculate how much to pay, the employer needs to know their employee's wages, which includes all cash wages, the value of meals, lodging, and other payments. The employer is also responsible for withholding federal income tax and reporting wages to the Social Security Administration (SSA). Additionally, depending on the wages paid and state and local laws, the employee may be eligible for unemployment benefits.
Although the nanny tax may seem like an extra expense, it helps protect the employee from not receiving their due benefits, and ensures that the family who employs them is following all legally required regulations. It is important for those who employ household workers to follow the nanny tax laws to avoid any costly penalties.