Are Your Clients Subject to the Nanny Tax?

Tax Law and News Young tax and accounting clients

The “Nanny Tax” provisions do not affect the majority of taxpayers and most will probably not be impacted by it. However, oftentimes when it does apply, the taxpayer isn’t even aware of it.

If you hire someone to work in your home, you may be subject to the Household Employment tax, also called the Nanny Tax. While full-time nannies commonly fall into the category of household employees, other household employees could also fall into this category, including the following:

  • Part-time babysitters
  • Caregivers for elderly family members
  • Housekeepers
  • Gardeners

The thresholds for this tax are relatively low, so many people are required to pay these taxes and don’t even realize it. If you pay at least $1,900 in a tax year, or $1,000 in any quarter of the tax year to someone who both works in your home and whose tasks you direct, you are generally obligated to pay this tax.

The key factor in determining if the person is a household employee, rather than a contractor, is the “whose tasks you direct” prong. If you control the work the individual does, and when and how they do it, then you direct their tasks. If the person uses their own tools and also works for others, they are typically considered a contractor, and not your employee. If the person you hire is your spouse or parent, then their services are exempted from this provision.

If you meet the threshold for the nanny tax, then you are considered an employer and you need a Federal Employer Identification Number. This FEIN will be different from your business’s FEIN because the person you hire is an employee of your household, and not of your business. Obtaining an FEIN is easy to do online – apply for a “Sole Proprietor/Individual” FEIN online.

Since you are considered an employer, you must file a Form W-2 for your household employee. W-2s must be filed with both the IRS and a copy given to the employee by February 1 of the year following the tax year. If you have fewer than 20 household employees, you can file your W-2s for free online on the Social Security Administration’s website.

If you are subject to the nanny tax, you will need to include Schedule H (Household Employment Taxes) with your Form 1040 tax return. This schedule generally computes a 21.3 percent tax on the wages you pay your household employee. This is your share of the tax burden for Social Security, Medicare and the federal unemployment tax. This is in addition to the income tax and self-employment tax that you already pay. You may also have to pay state unemployment tax for your household employee.

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