Hiring a Nanny Means Paying Payroll Taxes
If you hire a nanny, you’ll be paying payroll taxes for them, also known as “nanny taxes.” Those can include Social Security and Medicare taxes, unemployment and more. And unlike Mary Poppins, all those bothersome details don’t take care of themselves by magic. So, let’s look at some of the obligations that come with hiring an employee to be a caregiver.
Are They Your Employee?
Is your nanny your employee? The same rules about employee or contractor (see our previous post) apply here. Basically, if you have control over how, when and where your caregiver does the work, they are your employee. If you want to try to sneak by calling your nanny an independent contractor and the IRS finds out, you’ll pay big time.
There are exceptions to the employee rule. If the caregiver is your spouse, your parent (usually), or your child under 21, they are not considered your employee. Likewise, a babysitter under 18 doesn’t count as an employee for tax purposes. If you pay someone less than $2,300 in a calendar year, you’re not obligated to pay payroll taxes. And that’s per nanny – if you paid one person $2,000 and another $2,000 in the same year, you wouldn’t pay taxes for either.
If you pay an agency to provide your nanny, then the agency is responsible for handling all the taxes. Similarly, if you’re dropping off your little darling at daycare, the daycare facility handles its own taxes.
If you’ve figured out you’re an official employer, now it’s onto those details.
First off, you’ll need to pay your nanny minimum wage. That’s $13.69 an hour in Washington state as of 2021. If you live in a city with a higher minimum wage, then you have to pay the highest minimum wage that applies. For example, you’ll pay at least $16.69 an hour in Seattle.
What Are Nanny Taxes?
Nanny taxes include Social Security and Medicare, for starters. You’ll want to withhold those from your caregiver’s wages, and you’ll be paying the matching employer share. That’s 7.65 percent of total wages for each of you.
You may want to give your caregiver a W-4 form to fill out. You’re not required to withhold income taxes from their pay, but most people prefer it. You can use income tax tables or a payroll service (more on that later) to figure out how much to withhold for income tax, then take that withholding out of their pay.
You’ll also need to pay unemployment insurance. In Washington state, we also have taxes for Paid Family and Medical Leave, and starting in 2022, Washington Cares tax (for long-term care insurance).
All told, you’ll be paying about 10-12 percent beyond the wages you’ve agreed on.
When Do You Pay Nanny Taxes?
You pay all the federal payroll taxes on your personal income tax return. You’ll include a Schedule H form when you file.
Paying a year’s taxes all at once can be hard on the bank account. A lot of household employers make estimated quarterly tax payments to spread it out through the year. Your accountant can help you figure out how much you should pay.
Something to ease the sting? If your child is under 13 (or permanently and totally disabled), you may be eligible for the Child and Dependent Care tax credit. Your credit can be up to $3,000 for one child or $6,000 for two or more, depending on your income.
Speaking of Accountants…
Using a payroll service (like we offer here at Andrews Tax Accounting) can make handling nanny taxes much easier. We can create a paycheck, tell you how much the taxes are every time you want to pay your caregiver, and make sure they get filed on time throughout the year. And we’ll generate a W-2 at the end of the year.
Even Mary Poppins needs a living wage, or she’ll have to quit.
The IRS has an information page on federal portion of nanny taxes.
Lastly, you can learn more about our services here!