Household employers often hear about the “nanny tax”, but they often do not know what that means. Below is a primer on the payroll taxes that exist for nannies and employers of nannies:
Simply put, the “nanny tax” is the combination of federal, state, and local tax requirements that a household employer is responsible for when employing a household employee (ANY household employee, not just nannies).
For most household employment situations, Social Security and Medicare Taxes are required. Collectively referred to as FICA, Social Security and Medicare are typically a shared tax where the employer and employee each pay 7.65%. Household employers may pay both the employer and employee portion of this tax so that the employee does not have any FICA taxes withheld.
For 2022, FICA taxes are required when an employee earns more than $2400, and these taxes are owed on ALL wages (ie withholdings start with dollar one, NOT once the $2400 threshold is met).
Household employees may also have federal and/or state income taxes withheld. Household employees are not required to have these taxes withheld from their paychecks, but that does not mean that the liability does not exist. We recommend that household employees consult with their tax preparer when completing their W-4 (and state withholding tax form) to ensure they are filling out these forms properly based on their individual and household circumstances.
Household employers generally remit both state and federal unemployment taxes. The state unemployment (SUTA) tax rate is assigned by the state and each state has their own taxable wage base for calculating liability. For example, 2022 new employers in Texas are generally assigned a SUTA rate of 2.7% and they pay this tax on the first $9000 in wages paid to each employee - this means that if a household employee earns at least $9000 in 2022, the employer will pay $243 for their state unemployment taxes. Employers also pay Federal Unemployment (FUTA) taxes. The FUTA tax rate is 6% and for 2022, the tax applies to the first $7000 in wages paid to each employee. Generally, if an employer pays state unemployment taxes, they will receive a credit of up to 5.4% of taxable wages meaning for most household employers, they pay 0.6% on the first $7000 in wages for each employee - this means that if a household employee earns at least $7000 in 2022, the employer will pay $42 for their federal unemployment taxes.
Please be aware that where you work and live will impact the tax requirements. For example, not all states have income taxes. Some states and localities have additional taxes for employees, employers, or both. If you’d like more information on the tax requirements for you and your employee, please call our office at 877-626-6924 and one of our friendly payroll and tax pros will be happy to provide the payroll tax requirements for you and your employee based on your location and situation.