The Nanny Tax Part 1: To Pay or Not to Pay?

Zoe Baird. Kimba Wood. Sound familiar? Both of these  prominent women were nominated for high-level political appointments only to see their nominations torpedoed due to not paying taxes on their household help. It’s a common story these days; many families either don’t know about the so-called ‘nanny tax’ or simply choose not to pay it. After all, no one really pays these taxes right? Well, you may want to reconsider. Last winter while out on maternity leave, I hired D2’s amazing nanny, Eve. I quickly received an education from Bonnie Yormack, my wonderful accountant of 10+ years, about my tax obligations for D2’s childcare. Not only is Bonnie principal and owner of  New York-based Lynn-Mark Tax & Business Consultants, she’s a working mom to boot and understands the financial challenges of raising a family.  My biggest question for Bonnie at the outset was, “Do I really have to pay this?” The answer was yes. Not only is it the right thing to do. It’s the legal thing to do. I admit I was more than a little overwhelmed and intimidated by the process but Bonnie quickly got me on the right track. With tax season right around the corner, I thought it good timing to sit down with her to clear up the confusion about the nanny tax – what it is, what your obligations are as a tax payer and how to pay it.  This is the first of two posts that I hope will shed some light and help you make your own decision come tax time. (Small disclaimer: this is general information and it goes without saying you should always consult your accountant about your situation.)

What exactly is the “nanny tax” and who is obligated to pay it?
In general, the Internal Revenue Service requires payroll tax filings by a household employer (sometimes called domestic employer by the IRS) who pays a household employee more than $1700 (2011) cash wages in a calendar year. These nanny payroll taxes are collectively referred to as “nanny taxes”.

As an employer, your nanny payroll tax obligations may include:

• Social Security & Medicare Taxes (7.65% of Gross Wages) [FICA taxes]
• Federal Unemployment Tax (FUTA) (0.8% of Gross Wages or less in Most Circumstances)
• State unemployment and disability insurance taxes levied on the employer.
• Possible workers comp and disability may be required by your home state.

If my family employs a  part-time babysitter to watch my children every day after school, should I be concerned about paying employee taxes? What if I am utilizing other domestic services like housekeeping or elder care? Am I required to pay taxes on these individuals as well?

Yes. Any individual you employ to provide services in your home whom you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold ($1700 in 2011) must receive a W-2 from the employer (your family) and you the employer must pay the payroll taxes. So this includes:

• Social Security & Medicare Taxes (15.3% of Gross Wages – employer may collect 7.65% from the employee via deductions. For 2011 ONLY, the household employee’s contribution to Social Security & Medicare Taxes is reduced to 5.65%. Employer contribution remains the same.)
• State Unemployment Taxes where required.
• Federal Unemployment Tax (FUTA) where required.

It’s also important to note that as the employer, you are responsible for paying Social Security and Medicare taxes. If you don’t collect this tax from your employee through periodic payroll deductions, you are still responsible for  paying the tax to the IRS. Your employee (in this case your nanny)  CANNOT pay her share of Social Security and Medicare tax for you. You must do this.

If my nanny is not a legal US resident, should I still pay taxes on her?

Yes. According to the The Internal Revenue Code, the immigration status of your nanny or other employee has no bearing on your obligation for employment taxes. The IRS requires that workers ineligible for Social Security Numbers file Form W-7 to request an Individual Taxpayer Identification Number (ITIN). This number will be used on all tax reports and returns, including Form W-2.

If my nanny offers to file her own taxes is this okay?

As the household employer, you are obligated to remit your nanny’s taxes to the IRS. However, if she offers to pay her fair share of the Social Security and Medicare, and possibly Federal and state taxes, what you can do is deduct her share of employee taxes from her net pay.

Next post I’ll discuss how to pay the nanny tax and where you can get more information to help you determine what’s right for your family.