Do you have a household employee such as a nanny, a caregiver for an elderly relative, or a live-in housekeeper?
Then you may be subject to a hidden tax, often referred to as the nanny tax (although it applies to a variety of household employees, as seen below).
What is the Nanny Tax?
The nanny tax refers to your duty to:
- withhold and deposit a household employee’s share of Social Security and Medicare taxes on wages paid to the employee and to
- deposit the employer’s share of those taxes.
If these taxes are not paid, both the nanny and the family will face serious penalties. They run the risk of facing tax fraud charges, as well as paying an exorbitant amount of interest on the taxes left unpaid and unfiled.
Who Qualifies as a “Household Employee?”
According to IRS Publication 926, Household Employer’s Tax Guide, household employees are individuals who do household work—such as performing as a nanny, caretaker, private nurse, babysitter, housekeeper, maid, driver, or butler. Household work includes only performing services in or around your private home.
Additionally, a person who does household work is your employee if you control not only what work is done but also how the work is done. If a worker regularly comes to your home on a schedule dictated by you and is supervised by you, the worker is probably an employee.
It doesn’t matter whether the work is full time or part time, whether they live in your home or outside the home, or whether you hired the worker through an agency. However, if an agency supplies the worker and controls what work is done and how it’s done, the worker is not your employee.
Landscapers, pool service professionals and the like who provide services to the general public and work at your house periodically to provide their services are not your employees.
For 2021, the FICA tax issue arises only if you pay a household employee $2,300 or more during the year.
We Can Help
Navigating the nanny tax rules is far from simple – they are complicated, and complying with them can be a time-consuming nuisance.