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The “Nanny Tax” Must Be Paid for Nannies and Other Household Employees

Employing a household worker, such as a nanny or housekeeper, comes with specific tax responsibilities that you should be aware of to stay compliant. Commonly referred to as the “nanny tax,” these obligations ensure that both you and your employee fulfill your legal duties regarding Social Security, Medicare, and federal unemployment taxes. Here’s a comprehensive guide to understanding and managing these requirements.

Understanding the “Nanny Tax”

The “nanny tax” encompasses the employment taxes that you must pay as an employer of a household worker. These taxes include Social Security and Medicare taxes, as well as federal unemployment tax (FUTA). While federal income tax withholding is not mandatory, the other obligations are crucial for compliance.

Social Security and Medicare Taxes

For 2024, if your household employee earns at least $2,700 in cash wages, you are responsible for both:

  • Employer Share of Social Security Taxes: 6.2%
  • Employer Share of Medicare Taxes: 1.45%
  • Employee Share of Social Security Taxes: 6.2% (to be withheld from the employee’s wages)
  • Employee Share of Medicare Taxes: 1.45% (to be withheld from the employee’s wages)

These taxes contribute to your employee’s future Social Security and Medicare benefits.

Federal Unemployment Tax (FUTA)

Additionally, you must pay federal unemployment tax on wages of $1,000 or more. The FUTA tax rate is applied only to the first $7,000 of wages paid to each employee. This tax helps provide unemployment benefits for workers who lose their jobs.

Managing the Tax Obligations

To handle these responsibilities, you can:

  1. Increase Quarterly Estimated Tax Payments: Adjust your quarterly estimated tax payments to cover the additional liability from employing a household worker if needed.
  2. Increase Withholding from Your Wages: Alternatively, increase the federal income tax withheld from your own paycheck to account for the nanny tax obligations.
  3. Maintain Accurate Records: Keep thorough records of all payments made to your household employee and the taxes withheld and paid. This documentation is essential for filing your annual tax return.

Reporting and Filing Requirements

In addition to paying these taxes, you must also comply with reporting requirements. This includes:

  • Filing Form W-2: Report the wages and taxes withheld for each household employee.
  • Submitting Form W-3: Send this form to the Social Security Administration to report the total wages and taxes for all employees.

Seeking Assistance

Navigating the “nanny tax” can be complex, but understanding and fulfilling your tax responsibilities is crucial for avoiding penalties. For personalized advice and assistance with managing your “nanny tax” responsibilities, contact Guerrero CPA at 210-490-7100. Our experts are ready to help you navigate the complexities and ensure that you meet all your tax obligations with ease.