You may have heard of the “nanny tax.” But if you don’t employ a nanny, you may think it doesn’t apply to you.
Hiring a housekeeper, gardener, or other household employee (who isn’t an independent contractor) may make you liable for federal income, state tax obligations, and other taxes. If you employ a household worker, you aren’t required to withhold federal income taxes from pay, unless the worker requests it. If requested, the worker should fill out a Form W-4 to reflect the withholding.
If you pay cash wages of $1,000 or more in any calendar quarter to household workers, you may be required to pay federal unemployment tax (FUTA tax rate is 6.0% on the first $7,000 of wages paid). Similarly, if you pay a household worker $2,300 or more in cash wages during the tax year (2021 threshold, subject to change), you are generally required to withhold and pay Social Security and Medicare taxes (6.2% and 1.45%, respectively). Learn more about the Social Security an Medicare tax rates here.
2024 Threshold Increases
In 2024, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,700 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA. However, if a nanny is under age 18 and child care isn’t his or her principal occupation (like a student), you don’t have to withhold FICA taxes.
You can elect to pay your worker’s share of Social Security and Medicare taxes, and if you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you provide.
How to Report/Pay
As a household employer, you can meet your tax obligations for Social Security and Medicare taxes (FICA) and federal unemployment tax (FUTA) by increasing your quarterly estimated tax payments or adjusting the withholding from your wages. This is a way to ensure that you are covering the tax liabilities associated with employing household workers.
Household employers are not required to file separate employment tax returns. Instead, the taxes are reported on your individual income tax return using Schedule H (Form 1040), which is specifically designed for household employment taxes. When reporting household employment taxes on Schedule H, you'll need to include your Employer Identification Number (EIN), not your Social Security number. You must obtain an EIN by filing Form SS-4 with the IRS. The EIN serves as a unique identifier for tax purposes and helps differentiate your personal tax obligations from those related to household employment.
If you own a business as a sole proprietor and employ household workers, you may include the taxes for household workers on the FUTA and FICA forms (Form 940 for FUTA and Form 941 for FICA) that you file for your business. In this case, you would use your sole proprietorship EIN to report the taxes associated with both your business and household employment.
Keep Records
As always, we encourage all of our clients and readers to keep meticulous records. A good rule-of-thumb is to keep all tax related documents for at least 4 years from the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.
If you need assistance or have questions about how to comply with these employment tax requirements, contact us or schedule an appointment.