Who’s Afraid of Nanny Taxes?

The tax code says that anyone who pays a nanny who is not their spouse, parent, a dependent child under age 21, or a non-family member under 18, may owe nanny taxes. Most tax experts, however, believe that compliance with nanny tax rules is extremely low—and for obvious reasons. Not only is paying the tax expensive, but wading through the tax regulations is hard work.

The tax code says that anyone who pays a nanny who is not their spouse, parent, a dependent child under age 21, or a non-family member under 18, may owe nanny taxes. Most tax experts, however, believe that compliance with nanny tax rules is extremely low—and for obvious reasons. Not only is paying the tax expensive, but wading through the tax regulations is hard work. (Tip: You can go online to Google and plug in “nanny taxes” for a list of companies that will do the work for you.)

The nanny tax is actually a couple of taxes. The biggest is FICA, which includes both Social Security and Medicare taxes. If you paid a nanny, cleaning lady, or other domestic worker more than $1,700 last year ($1,800 this year), you owe FICA taxes, which are 15.3% of wages. Employers usually pay half of this amount and withhold the other half from the employee’s wages. Most people who hire a nanny, though, pay in cash and don’t withhold any FICA taxes. In that case, you pay both ends of the tax, the full 15.3%. The portion that you pay on your nanny’s behalf then becomes taxable wages to him or her and must be reported on his or her W-2.

The first $7,000 in wages that you pay your nanny is subject to the Federal Unemployment Tax (FUTA), but only if you pay the nanny more than $1,000 in any one calendar quarter. The FUTA rate is a hefty 6.2%, which may be offset by any state unemployment taxes you pay. And although you don’t have to withhold income taxes from your nanny’s pay, you do have to file a W-2 form with the IRS at the end of the year and give a copy to the nanny. To do this, you’ll also need to get an Employer Identification Number (EIN) from the IRS.