FREQUENT QUESTIONS

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 taxes are commonly known as "nanny taxes" and include Social Security, Medicare, state and federal unemployment tax and federal and state income tax. While these employment taxes are called "nanny taxes", they apply to all employees working in your home — babysitters, nannies, housekeepers and home health care providers.
back to the top

Why should I pay nanny taxes?
If you're thinking, "Why should I pay nanny taxes? No one else pays them and I'm not running for public office." There are three reasons you should pay nanny taxes:

It's the right thing to do.
You save money by paying nanny taxes. There are two strategies to reduce your nanny taxes: Flexible Spending Accounts and Dependent Care Tax Credits. See How can I save money by paying nanny taxes for more information.
The IRS will catch you. Your income tax return asks "Did you pay anyone working in your home $1,600 or more?" If you check yes, the IRS looks for your nanny tax payments. If you say no, you compromise your federal income tax return and may be audited. See Can the IRS catch me if I haven't paid nanny taxes? for more information.

back to the top

Who is required to pay nanny taxes?

If you pay an employee working in your home $1,600 or more a year, you must pay nanny taxes.
If you pay an employee working in your home $1,000 or more per calendar quarter, you must pay nanny taxes and file them quarterly.

See When do I pay nanny taxes? for more information.
back to the top

How much do nanny taxes cost you?
Nanny taxes cost less than you think. Generally, the employer's nanny taxes cost about 10% of the employee's salary. For example, a nanny earning $500 per week would cost $50 per week in nanny taxes. The good news is that tax credits can offset this cost. See How can I save money by paying nanny taxes for more information.
back to the top

How much do nanny taxes cost your employee?
Generally, a single nanny with no children will take home about 80% of her gross earnings. For example, a nanny earning $500 per week would earn about $400 after taxes. Actual wages vary based on the employee's marital status, number of dependents and the state you live in.
back to the top

How can I save money by paying nanny taxes?
There are two strategies to minimize your nanny taxes. You can use either a Flexible Spending Account or the Dependent Care Tax Credit to reduce your nanny tax costs. These credits are only available if you pay your nanny taxes.

The Flexible Spending Account. With this option, you may completely offset your nanny tax costs! For example, paying your nanny $500 a week will lead to nanny taxes of about $1,900 annually. By putting $5,000 into your Flexible Spending Account, you reduce your annual taxes by about $2,500. The result? You reduce the cost of paying nanny taxes to $600. Check the availability of this benefit with your company or benefits staff.
OR
The Dependent Care Tax Credit. This is a credit towards taxes you owe that is based on the number of children you have under the age of 13. The credit can reduce your federal taxes by $600 for one child or $1200 for two or more children. For example, if you owe $1,300 in income taxes, this benefit will reduce your taxes owed to $100 (if you have two children) or $700 (if you have one child).

back to the top

How can the IRS catch me if I haven't paid nanny taxes?
YES. There are several ways you can be "caught" by the IRS. If:

Your employee doesn't work out and you fire her, she may apply for unemployment benefits. If you haven't paid nanny taxes, the state unemployment office will fine and penalize you, and report you to the IRS.
Your employee becomes disabled, cannot work and files for social security disability benefits. If you haven't paid nanny taxes, the Social Security Administration will impose back taxes, interest and penalties.
Your employee files a tax return and includes the wages from your employment. If you have not provided a W-2 to the employee, the IRS will fine and penalize you for the back taxes.
Your tax return does not include available tax credits (such as the Dependent Care Tax Credit or Flexible Spending Account) the IRS becomes suspicious.
Your employee retires and applies for Social Security benefits.

There is no statute of limitations for failing to report and pay federal payroll taxes.
back to the top

When do I pay nanny taxes?

Federal nanny taxes (Social Security, Medicare, income taxes, and federal unemployment) are generally paid with your federal income taxes.
State nanny taxes (unemployment and income taxes) are generally paid quarterly.
In addition, you must give your employee a W-2 by January 31 and file the W-2 and W-3 with the Social Security Administration by February 28.

back to the top

Am I required to withhold federal and state income taxes?
You are not required to withhold these taxes unless your employee asks you to and you agree. If you do not withhold income taxes, your employee must pay these taxes. If your employee pays these taxes herself, she may need to make quarterly estimated tax payments.
back to the top

What are unemployment taxes?
Federal and state unemployment taxes fund unemployment payments to workers who have lost their jobs. Each state has a different method for determining your unemployment taxes and tax rate. If you pay state unemployment taxes, you can get a credit toward federal unemployment taxes, and the credit may exceed your state unemployment taxes.
back to the top

What are the penalties involved with late filing of withholding taxes?
The IRS calculates penalties for late filings and late payments.

Late filing: for each whole or part month that a return is late, there is a penalty of 5% of the unpaid tax due with that return. The maximum penalty is 25%.
Late payments: for each whole or part month the tax is late, a penalty of .5% of the amount of the tax generally applies. The maximum penalty is 25%.

Each state has different penalty schedules for late filing of income tax withholding and unemployment taxes. For example, Illinois imposes a minimum penalty of $50, plus 2% interest per month. The state of Connecticut charges either a $50 penalty or 10% of the unpaid taxes, whichever is higher. Clearly, filing nanny taxes late is very expensive.
back to the top

Can I hire an illegal alien?
It is unlawful to employ a person who cannot legally work in the United States. When you hire a household employee, you and the employee must each complete part of the Immigration and Naturalization Service Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work in this Country. You must keep Form I-9 with your other nanny tax records.
back to the top

Where do I get information about preparing nanny taxes myself?
If you want to prepare your nanny taxes:

Consult IRS publications 926 and 15, known as Circular E. This publication explains the federal laws and tax forms. The IRS estimates it takes 8 hours to complete federal nanny tax forms.
Contact your state taxation or revenue department for information about the state income tax laws and forms to complete. The time to complete state unemployment and income tax forms varies by state.
Contact your state department of unemployment regarding their filing requirements.

back to the top