Known to the IRS as a household employee tax, the nanny tax aims to collect FCI and FUTA taxes from people who employ workers in their home.
What Is The Nanny Tax?
The tax applies not only to nannies, but to all household employees, which are defined by the IRS:
The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.
You are responsible for paying this tax if you:
- Pay cash wages of $1,800 or more in 2012 to any one household employee, or
- Pay total cash wages of $1,000 or more in any calendar quarter of 2011 or 2012 to household employees.
The only exclusions are for:
- Your spouse,
- Your child under the age of 21,
- Your parent, or
- Any employee under the age of 18 at any time in 2012.
How Much Is The Nanny Tax?
Like your employee which makes FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) payments for its employees, as an employer, you are responsible for paying FICA and FUTA payments for your employees.
- The FICA tax is 6.2% for social security tax and 1.45% for Medicare tax, for a total of 7.65%.
- You should also withhold the employee’s share of FICA tax (4.2% for social security tax and 1.45% for Medicare tax, for a total of 5.65%).
- The FUTA tax is 0.6% if it’s paid by April 15th of the following year. This is not withheld but should be paid with your own funds.
- Total it all up and you are paying 13.9% of the employee’s wages to the Nanny tax (8.25% is your burden added to the amount you pay your household employee and the rest is withheld from the employee’s payment).
And this doesn’t even cover state taxes!
Why Should You Pay The Nanny Tax?
- It’s the right thing to do. Just because you don’t like it doesn’t make it any less of a tax. There are many people who believe income taxes should be lower, that doesn’t give them the right to cheat on their taxes.
- Fear of getting caught. The likelihood of getting caught is pretty low (especially when hiring an undocumented worker), but one common way to get caught is if you have to fire your nanny. The household worker may try to file for unemployment benefits, at which time it will be obvious that you never paid into the system and you’ll be on the hook for owing back taxes, interest, and penalties to both federal and state governments.
Why Should You Not Pay The Nanny Tax?
- The administrative burden – It took me awhile just to find out all this information. Actually filing the proper paperwork and tax forms would take even longer. Doing this every week or two for household employees would be time consuming, if nothing else.
- The extra cost – Paying an extra 8.25% on top of what you pay your nanny doesn’t sound like fun. When you have children, extra costs aren’t welcome.
- No one else is doing it – It’s estimated that 85-90% of eligible people are not paying this tax). Why be the only one of your friends to pay the tax?
- You may “scare off” a good nanny who doesn’t want to be paid above board or be subject to taxes.
In my opinion, everyone should be paying this, treat it like any other tax and don’t think about what your friends are doing. Hire someone to handle this for you or search for someone to efile your yearly taxes online. It’s worth the money to have piece of mind. Imagine getting caught 10 years down the road (there is no statute of limitations on tax fraud). You’ll likely think back and say that you should have just ponied up the extra cash.
Solid post. You absolutely should pay nanny tax.
I was actually a nanny for a family through my undergrad. They paid all the taxes as they should, and that allowed them to qualify for a tax credit for childcare expenses on their own tax return.
You should always to everything by the book because 1) it’s honest so it’s THE RIGHT THING and 2) bad consequences are bad. Personally I’m not in the mood to ever get in trouble to tax fraud.. yikes
Yes, you should pay the nanny tax. Just because nobody else does it, doesn’t mean you don’t have to.