When you employ household workers – including nannies, babysitters, housekeepers, cooks, gardeners, health care workers, and others – you may be obligated to pay certain taxes, sometimes known as “nanny taxes.” However, determining when you owe (which employees trigger the taxes), what is owed, and how to file can be a source of confusion. Here’s a quick guide to the when, what, and how of nanny taxes.
When To File
You are liable to pay domestic worker taxes for any household workers who reach employee status. Excluded from employee status are independent contractors. There are several rules to distinguish between employees and independent contractors. The household worker is not an employee, and thus you are not liable to pay domestic worker taxes when:
- The individual is hired through an agency, and you pay the agency who then pays the employee
- The individual dictates when and how the work is done
- For example, a self-employed worker who provides their own tools, sets their own schedule, and offers services to multiple households/the general public
What to File
When employee status is achieved, you must determine the appropriate taxes to file. Potential domestic worker tax considerations include the following:
Income Tax: The decision of whether or not to withhold federal and state income tax is up to the employer and is not required for a household employee. If the employer and employee agree to have federal and/or state income tax withheld, the employee will need to provide form W-4 to withhold income taxes on both cash and noncash wages.
FICA Taxes: A threshold, set annually by the IRS, determines whether you must withhold or pay FICA taxes (Social Security and Medicare). If a household employee earns $2,400 or more in cash wages in 2022, FICA taxes must be paid by both you and the employee. In other words, you pay the employer’s share of Social Security taxes (6.2%) and Medicare taxes (1.45%) and are responsible for withholding or paying the employee’s share of the taxes (also 6.2% and 1.45%, respectively).
Note: If you employ a household worker under the age of 18 and working for you isn’t their principal occupation, you are not liable to pay FICA taxes for this worker if the annual cash wage is less than $2,400. An example would be a student who babysits on the side.
Unemployment Taxes: Federal unemployment tax (FUTA) must be paid when you pay total cash wages equal to or greater than $1,000 in any quarter in the current or preceding calendar year. The tax applies to the first $7,000 of the household employee’s cash wages at a 6% rate. Often, credits are available that reduce that rate to 0.6%. You are also required to file and pay state unemployment taxes on a quarterly basis. The state unemployment tax rate will vary depending on the state.
How to File
Federal domestic worker taxes are reported annually on the employer’s Form 1040 on Schedule H. Based on the amount of the tax, the employer may be required to make federal quarterly estimated tax payments. If the employer agrees to withhold state income taxes, they may be required to file and pay quarterly withholding returns. This will vary based on the state where the services are performed. Also, if cash wages exceed $1,000 per quarter, the employer will also be required to file and pay state unemployment tax.
No matter how household employment taxes are reported, you are responsible for paying the tax throughout the year, either through quarterly estimated tax payments or by increasing withholdings from your wages. If this responsibility is neglected, you’ll be required to pay the tax when you file your return and may be subjected to penalties for underpayment of estimated tax.
Finally, if you’re obligated to pay FICA taxes or agreed to withhold income taxes for a household employee, you’ll also need to file Form W-2.
Boulay Can Help
Beyond the domestic worker tax requirements described above, there are many other employer obligations to be addressed, such as compliance with minimum wage and overtime requirements, documenting immigration status and more. If you employ household workers, consulting your tax advisor is the best way to gain full clarity on domestic worker tax obligations and related responsibilities. Contact a member of our tax team today at 952.893.9320 or learnmore@boulaygroup.com.