What is it and how to calculate it

The nanny organizes various activities and plays with the baby.

Hiring a nanny can provide much-needed support for families, but it also comes with its own financial responsibilities. One such duty is the “nanny tax,” a federal requirement that applies to families who employ domestic workers, including nannies, caregivers and housekeepers. Beginning in 2024, if you pay your household worker $2,700 or more per year, federal law requires Social Security and Medicare taxes to be withheld in addition to unemployment taxes.

A financial consultant can help you understand your tax obligations, manage payroll taxes, and ensure you pay your taxes correctly.

What is the nanny tax?

The nanny tax refers to federal and state taxes that employers must pay for domestic workers. If you hire a nanny and pay her above a certain threshold, you are considered her employer and must withhold and pay certain taxes on her behalf, as well as the employer’s share of payroll taxes. Tax primarily includes Social Security and Medicare taxes (also known as FICA taxes), federal unemployment tax (FUTA), and possibly state employment taxes.

The IRS sets a threshold for when you must pay nanny tax. If you pay your household worker wages of $2,700 or more during the year in 2024, you will be required to withhold and pay those taxes. It’s important to note that this tax applies regardless of whether the nanny works part-time or full-time.

Who pays the nanny tax?

The nanny tax is primarily borne by the employer of the household, which is the person or family who hires the nanny. The employer must calculate and withhold the appropriate Social Security and Medicare taxes from the nanny’s salary. These taxes are split equally between the employer and the nanny, each accounting for 7.65% of the nanny’s salary. In addition, the employer is responsible for paying the full amount of federal unemployment tax (FUTA) and, in some cases, state unemployment insurance taxes.

It is important to distinguish between independent contractors and employees. Nannies are by definition considered household employees rather than independent contractors, so these taxes must be paid by the household’s employer. Misclassifying a nanny as an independent contractor can result in penalties and unpaid taxes.

How to calculate nanny taxes

To calculate your nanny tax, you will need to determine the wages paid to your nanny and apply the correct tax rates. Here’s a step-by-step breakdown:

Determine wages: The first step is to figure out how much you pay your nanny in total for the year. This includes not only hourly wages or salary, but also any bonuses, overtime, or additional compensation such as health insurance or travel reimbursement.
Calculate FICA taxes: In 2024, combined Social Security and Medicare taxes will be 15.30% of wages. The employer and nanny pay 7.65%. To calculate FICA taxes, take your nanny’s total wages for the year and multiply that figure by 7.65% to find the amount you must withhold from her paycheck. Also, compare it to the equal amount you, as the employer, will pay.
Calculate FUTA taxes: Federal unemployment tax is 6.00% of the first $7,000 of your nanny’s annual salary. However, if you pay state unemployment taxes, the IRS provides a credit of up to 5.40%, reducing your federal rate to 0.60%. Only the employer pays FUTA; The nanny is not responsible for paying this tax.
Find out any state taxes: Depending on where you live, you may have to pay additional state unemployment or disability insurance taxes. State requirements vary, so it is critical to check with your state’s labor department or taxing authority to understand your specific obligations.

Reporting and paying nanny taxes

Once you have calculated your nanny taxes, you must follow the appropriate steps to report and pay them. The IRS requires household employers to file Schedule H (household employment taxes) with their federal personal income tax return. This form helps you report all Social Security, Medicare, and FUTA taxes you must pay for your nanny.

You will also need to withhold the correct amounts from your nanny’s salary throughout the year and pay those taxes regularly, usually quarterly. Many employers choose to work with a payroll service that specializes in domestic workers to manage these withholdings and payments while ensuring compliance with all tax laws.

For state unemployment taxes, you may need to file a separate return with your state tax authority, so be sure to check your local rules. Some states may require quarterly reporting, while others may only require annual reporting.

Nanny Tax Exclusions and Special Considerations

Not every domestic worker is subject to nanny tax. There are some exceptions to be aware of:

Family members: If your nanny is a close relative (and childcare is not their primary occupation), such as your child (under age 21), spouse, or parent, you may not have to pay nanny tax.
Employees under 18 years of age: If your nanny is under 18 at any time during the year, you may not have to withhold Social Security and Medicare taxes unless the housework they perform is their main occupation.
Salary below threshold: If you pay your nanny less than the annual threshold set by the IRS ($2,700 in 2024), you are not required to withhold or pay Social Security and Medicare taxes. However, you may still be responsible for paying unemployment taxes, depending on state laws.
Cashless payments: If you provide your nanny with non-monetary benefits such as room and board, these can often be excluded from pay for tax purposes.

It’s also important to remember that the nanny tax applies to all domestic workers, not just nannies. If you employ a housekeeper, gardener or any other worker in your home, you may have to follow similar tax rules.

Fines for non-compliance

Failure to pay or properly report nanny taxes can result in several serious consequences. The IRS may impose back taxes, interest and penalties on unpaid amounts if employer-households fail to meet their tax obligations. In addition to these financial penalties, employers may also face additional legal costs and potential audits.

Particularly at risk are employers who try to pay their nanny “under the table” to avoid taxes. If discovered, it could result in more severe penalties, including taxes and interest, as well as penalties for tax evasion. In some cases, employers may be held liable for unpaid Social Security and Medicare taxes owed to the nanny, further adding to the financial burden.

To avoid these problems, it is important to handle all tax issues related to domestic workers transparently and in accordance with federal and state regulations.

Bottom line

A nanny involved in educational work with a girl.

Understanding and managing nanny taxes is an important part of hiring domestic staff. By familiarizing yourself with tax requirements and learning how to handle Social Security, Medicare, and Unemployment tax withholdings, you can meet your responsibilities as an employer. Knowing the thresholds and exceptions helps ensure compliance with federal and state laws. While it may seem complicated at first, taking the necessary steps to calculate, report and pay these taxes can help you avoid penalties and maintain professional legal arrangements with your domestic workers.

Tax planning

A financial advisor can help you optimize your finances and reduce your tax liability. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool will match you with up to three vetted financial advisors who serve your area, and you can take a free introductory call with your eligible advisor to decide which one you think is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.
SmartAsset’s Salary Calculator can help you calculate take-home pay for both salary and hourly jobs, taking into account federal, state and local taxes.

The article “Nanny Tax: What It Is and How to Calculate It” first appeared on SmartReads by SmartAsset.