Tax Guide, Dependents
What is the Nanny Tax?
If you pay a nanny (or any household employee) more than $2,400 in 2022, then unless your nanny is your parent, spouse, child under age 21, or someone under age 18 whose principal occupation is not household employment (such as a student), then you owe the tax.
The nanny tax is Social Security and Medicare taxes (FICA, which is 15.3%* of wages), and the federal unemployment tax (FUTA**). You will probably also owe state unemployment tax and perhaps state disability tax as well.
*Technically, the employer (you) and the employee (the nanny) each owe an amount equal to 7.65% of the wages, for a total of 15.3%. You can withhold the nanny's half from her paychecks (like your employer does at work), but few people actually do this. Most simply pay the nanny a cash wage without any withholding. When this happens, you must pay the entire 15.3%.
**FUTA is due on the first $7,000 of the nanny's wages for the year — but only if you paid $1,000 or more in any calendar quarter for the current year or preceding year (2021 and 2020 respectively, if you are filling out your 2021 return). And only if that nanny is not your parent, spouse or under-age-21 child. The FUTA rate is usually only 0.6%, assuming you paid the state unemployment tax you owe by April 15 of the following year. If you don't, the FUTA rate jumps to 6% of wages.
Important Note: Most of clients who hire a nanny use a payroll company specializing in nanny taxes to take care of the reporting requirements (tax withholding, preparing the W2, Schedule H, making estimated tax payments, etc.). I will need the Schedule H that was prepared for you at tax time. While I have general information below, I advise you to do an internet search for "nanny tax payroll" to seek out companies that can assist you with payroll.
For complete information, see:
IRS Publication 926: Household Employer's Tax Guide
SSA Publication No. 05-10021: Household Workers
The following steps must be taken:
1. An Employer ID is Required
To issue your nanny Form W-2 and to pay the household employment taxes, you will need an Employer Identification Number (EIN), which is applied for on Form SS-4.
Form SS-4 (to print and mail)
Apply for an Employer Identification Number (EIN) Online
2. Register for State Unemployment
To find out whether you will owe state unemployment tax, contact your state unemployment tax agency. It may be necessary to register and get a state ID number as well as fill out a year end report.
Register for New York.
Register for New Jersey (select option "Register a new partnership or proprietorship"). See also additional NJ info.
Register for Connecticut. See also additional CT info
When you file your 2022 federal income tax return in 2023, attach Schedule H (Form 1040), Household Employment Taxes, to your Form 1040. Use Schedule H to figure your total household employment taxes (social security, Medicare, FUTA, and withheld federal income taxes). Add these household employment taxes to your income tax. Pay the amount due by April 18, 2023.
Instructions for Schedule H (Form 1040) Household Employment Taxes (This is a very good overview of what you need to do)
2018 Schedule H: Household Employment Taxes
4. Give Your Nanny Form W-2 (Wage and Tax Statement)
You must give your nanny Copy B, C and 2 of Form W-2 by January 31, 2023.
2021 Form W-2
Important: Please note that these forms cannot be filed with the government. You must get official forms from the IRS or an office supply store. Alternatively, you can file the government copy online. See #5 next.
5. Send Form W-2 to the Social Security Administration
Send Copy A of Form W-2 to Social Security Administration (this must be an official form; you cannot print the downloaded one). Deadline is January 31, 2023. If you paper file the W-2, you must submit it along with Form W-3. However, the Social Security Administration strongly suggests employers report Form W-3 and W-2 Copy A electronically instead of by paper.
W-2 Online is Social Security’s free electronic filing option for employers. With W-2 Online, you can access an electronic Form W-2, complete the form and submit it to Social Security over the Internet. The service even completes a Form W-3 (transmittal) for you. You also can print the copies your employee(s) need to file their taxes and copies for your records.
To get started, you’ll need to register for a PIN and password which you can do at the Business Services Online website: www.socialsecurity.gov/bso/bsowelcome.htm. For more information, including step-by-step instructions, go to www.socialsecurity.gov/employer/bsohbnew.htm.
See also http://www.socialsecurity.gov/employer/.
You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee's Withholding Allowance Certificate.
You can avoid owing tax with your tax return if you pay enough tax during the year to cover your household employment taxes, as well as your income tax. You can pay the additional tax in any of the following ways.
- Ask your employer to withhold more federal income tax from your wages in 2023.
- Ask the payer of your pension or annuity to withhold more federal income tax from your benefits.
- Make estimated tax payments for 2023 to the IRS.
- Increase your payments if you already make estimated tax payments.
January 31, 2023: Give your employee Form W-2.
January 31, 2023: Send Copy A of Form W-2 with Form W-3 to the Social Security Administration.
April 18, 2023: File Schedule H and pay your household employment taxes with your 2022 tax return.