What are nanny taxes?

When you hire someone to work in your home, the government considers you an employer. As an employer you are responsible for paying employment taxes. These employment taxes are commonly known as “nanny taxes” although they don’t only apply to nannies – they apply to anyone working in your home. This includes anyone who works in and/or around your home such as babysitters, caretakers, house cleaning workers, domestic workers, drivers, health aides, housekeepers, maids, nannies, private nurses, and yard workers. According to the IRS, a person is an employee if you’re telling them what they will do and how they will do it, as opposed to an independent contractor that you tell only what results you’re looking for. Families that misclassify their household employee as an independent contractor (by providing a Form 1099 for filing taxes) can be charged with tax evasion.

According to the IRS Household Employer’s Tax Guide, if you pay more than $2,100 annually or $1,000 a quarter to a person working in your home you need to pay employment taxes. This requires a family to withhold Social Security and Medicare and to pay a matching portion. State and federal unemployment insurance taxes may also be due.

There are two components of the “nanny tax”: the employee withholding taxes and the employer contribution. Typically, you’ll withhold Social Security and Medicare taxes and you may also withhold federal, state, and maybe city income taxes from your employee’s pay. As an employer, you’ll pay a matching portion of Social Security and Medicare as well as federal and state unemployment insurance taxes. States differ in their requirements, some don’t have income taxes while other states require additional taxes withheld.

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