The "Nanny Tax" Rules: What To Do If You Have Household Employees
If you pay someone to work in your home, such as a nanny, housekeeper, home health aide or personal caregiver, you may be a household employer. That brings tax responsibilities that many families do not expect, commonly called the "nanny tax."
Employee or independent contractor?
The key question is who controls how, when and where the work is done. A person who works under your direction, usually in your home and on your schedule, is typically an employee. A worker who runs their own business, supplies their own tools and serves several clients is more likely a contractor, such as a cleaning company. Calling someone a contractor does not make it so, and the IRS looks at the actual relationship.
What you may owe
If your worker is a household employee and you pay above the annual threshold set by the IRS, you generally must:
- Withhold the employee's share of Social Security and Medicare taxes, and pay the employer's share.
- Consider federal unemployment tax, which depends on how much you pay in a calendar quarter.
- Meet Georgia unemployment tax and other state requirements where they apply.
Federal income tax withholding is optional for household employees, but you can withhold it if your employee asks and you agree.
Practical steps
- Obtain an employer identification number for your household employment.
- Have the employee complete Form W-4 and Form I-9 to verify eligibility to work.
- Keep records of wages paid, taxes withheld and dates worked.
- Report the wages on Schedule H with your personal return, or use a payroll service.
- Give the employee a Form W-2 by the annual deadline.
Why it matters
Paying a caregiver off the books exposes you to back taxes, penalties and interest, and it leaves your worker without Social Security credit or unemployment protection. It can also cause trouble later if you apply for a mortgage or a government job. Reporting the arrangement properly may also help you claim credits for dependent care, which generally require that you identify your care provider.
Some families adjust their withholding or estimated payments to cover the added tax. Others use a payroll service to handle everything. Either way, doing it correctly from the start is far easier than fixing it later. The IRS publishes household employer guidance at irs.gov.
If you would like help setting this up, our payroll service or our office can assist.
This article is general information, not tax, legal or investment advice for your specific situation.