Nanny and Household Payroll Tax Information & FAQ
NannyChex has friendly tax experts ready to assist with your household employment. Please call us today at 877-626-6924 for a free consultation. We live answer our phones Monday through Friday during business hours so you won’t wait on hold. We’ll discuss your specific circumstances, what’s required of you as a household employer, and the unique requirements for your city and state with no obligation.
If you’d like to learn more before you call, keep reading…
Household employers are generally responsible for the following:
- Establishing an EIN and state/local employer accounts (varies by location).
- Reporting the new hire.
- Remitting federal and state unemployment taxes.
- Withholding/remitting other state and local taxes (varies by state).
- Withholding/remitting state and federal income tax withholdings (if applicable).
- Preparing and filing tax forms each reporting period and at the end of the year.
- Providing each employee with a W-2.
- Preparing a Schedule H, to be included with personal income tax return.
- Filing a W-3 with the Social Security Administration.
- Obtaining worker’s compensation coverage (varies by state).
Frequently Asked Questions…
Q. What are nanny/household payroll taxes?
A. Nanny and household payroll taxes are the employee and employer taxes that are due to the government as a result of having a household employee. Taxes vary by locality, but typically, these taxes will include Social Security and Medicare, federal and state income taxes, and federal and state unemployment insurance. In certain localities, other state and local taxes also might be due.
Q. Why should I pay nanny/household taxes? Are they required?
A. As a household employer, you are required to report and pay in all the payroll taxes applicable to your locality and employment situation. Social Security and Medicare taxes apply when a household employee will earn $2400 or more during the calendar year. In addition, state unemployment insurance taxes must be paid when your state’s threshold is reached, which is typically $1000 gross wages paid in a calendar quarter.
Q. Am I an employer? Is my nanny an employee? Could she/he be an independent contractor?
A. Nannies, and most other household employees, should be treated as employees, which makes the family a household employer. This determination is based on IRS guidelines, which provide criteria on how to classify employees. The key feature is control. If you control the parameters of the work including how and when the work is performed, you are an employer.
Q. What employee taxes need to be withheld from my employee’s pay checks?
A. Social Security and Medicare taxes (7.65%) need to be withheld if the employee earns $2400 or more during the year. Income tax withholdings are optional for a household employee, but highly recommended, so the employee does not owe a large amount of taxes on their yearly returns.
Q. When do I start withholding taxes from my employee’s wages?
A. Taxes are withheld from the first day of employment, and should be reflected on the first pay check issued.
Q. What are my employer tax responsibilities?
A. The employer must match the amount of Social Security and Medicare withheld from each payroll check. This match is 7.65% of the employee’s gross wages. The employer also pays federal and state unemployment insurance taxes. In some situations, additional state or local taxes will be due. Total employer taxes typically run about 10-12% of an employee’s gross wage.
Q. Are there other employer requirements?
A. The employer needs to report every new hire to the state. There also are monthly, quarterly, and/or yearly reports that need to be filed with your tax payments. In addition, a W2 form should be issued to each employee, year-end forms need to be filed with the state and Social Security Administration, and a Schedule H needs to be filed with your personal income tax return. NannyChex handles all these items as a regular part of our service.
Q. What is worker’s compensation insurance?
A. Worker’s compensation is an insurance policy that protects you if your employee is injured on the job, and makes a claim for lost wages and/or medical expenses. Each state administers their own worker’s compensation system, and the requirements vary. Some states require that you have a policy, while others make it voluntary. If you want to obtain a policy, please contact your homeowner’s insurance agent first. In some cases, an umbrella homeowner’s policy may already cover your employee, or they may be able to add a rider to your existing policy.
Q. Are there any benefits to the employer or tax credits for paying nanny/household taxes?
A. Household employers who pay their employee legally may have tax benefits available to them.
Some companies offer a Dependent Care Account that allows an employee with child or dependent care expenses to contribute up to $5,000 of their pretax earnings. This also is known as a Flexible Spending Account. The funds in this account are used to pay for childcare expenses tax-free.
If a Dependent Care Account is not available, the employer may be able to claim a tax credit on their personal income tax return through Form 2441-Child and Dependent Care Expenses. A tax credit of 20 to 35% is available on qualifying childcare expenses, which are limited to $3,000 for one qualifying dependent or $6,000 for two or more qualifying dependents.
Q. Am I required to pay overtime?
A. Yes, per the Fair Labor Standards Act, you are required to pay overtime of 1.5 times the regular hourly rate for a household employee who does not live with you, and works over 40 hours in a 7-day work week. If a household employee works more than 40 hours in a week and is paid a salary, overtime should be included in the salary computation. Live-in employees are subject to different overtime treatment and requirements vary by state. Some states also have special guidelines regarding how overtime should be calculated -please contact NannyChex for details.
Q. What are my obligations regarding vacation, holiday, and sick pay?
A. Household employers generally do not need to provide vacation or holiday pay. Household employers in some cities and states are required to provide sick pay for their employees (typically based on their employee’s hours worked). Please contact NannyChex for a free consultation and an account specialist will discuss your specific circumstances and provide you with the requirements of your city and state.
Q. Do I need to provide health insurance?
A. Currently, under the Patient Protection and Affordable Care Act, employers with under 50 employees are not required to offer a health insurance policy.
Q. Are there employer benefits to contributing to my employee’s health insurance costs?
A. A tax credit is available if:
- You pay at least 50% of your employee’s health insurance; and
- The employee’s annual compensation does not exceed $50,000; and
- The employee’s policy is purchased through the Small Business Health Options Program.
The tax credit can be as much as 50% of the amount you contribute. The credit decreases as the salary level of the employee increases, and limits vary by state as well.
In addition, employer contributions to the employee’s health insurance are non-taxable to both the employer and employee.
Q. What is required to become a household employer?
A. A household employer needs a Federal Employer Identification Number (FEIN) from the IRS, along with the applicable state and local tax accounts that are required. In addition, as payroll begins, the appropriate payroll taxes are withheld from the employee’s pay checks. These are all items handled by NannyChex for each of our clients.