How to Report the “Nanny Tax”? Reporting and Tax Issues

How to Report your Nanny Taxes

Finding a good nanny is a challenging task. You can’t leave your children with someone who isn’t trained to deal with children. When you manage to find a nanny that fits well with the family, then the only thing you need to take care of is payroll taxes. Calculating and filing the nanny’s payroll is intimidating and confusing.

The procedure is so complex that many parents feel the need to forgo taxes and decide to pay their nanny “under the table.” This is what you need to avoid, because not only is this illegal but it can prove very costly. When you fail to pay the Nanny Tax, you could face severe fines and penalties.

What is included in the Nanny Tax?

The Nanny Tax includes a combination of State and Federal Government Taxes, these taxes are:

  • Social Security
  • Medicare Taxes (FICA)
  • State and Federal income taxes are withdrawn from the employee
  • State or the Federal  unemployment insurance taxes that employers are liable to pay

It becomes mandatory for you to report your Nanny Tax when you pay your nanny or any other household employee $2100 or more in a single calendar year.

Nanny as an Employee

You are bound to report your Nanny tax because as the IRS states that a person is considered as your employee when you direct them or give them instructions for performing specific tasks. In return, the person performs as directed. This makes Nanny your employee and not an Autonomous or Independent Contractor. Never report your Nanny as a self-employed contractor by providing Form 1099 for tax filing. Doing so could get you indicted for tax evasion by the state of federal government.

The Federal Employment Taxes

Nanny is considered as a household employee, as their employer you are obligated to make annual payments for Medicare, Social Security and Withheld Income Tax along with Federal Unemployment Tax (FUTA). You are required to report your Nanny Tax through the family annual Federal Income Tax return using the Form 1040 Schedule H. All the Federal Employment Taxes are added to your family’s total yearly Federal Tax liability. The taxes are subjected to underpayment penalties as well.

Information needed for Families to Pay Nanny Taxes

When you are reporting your Nanny Taxes to the IRS, you would need the following:

Tax ID Numbers

For reporting your Nanny Tax, you are required to have the State and Federal ID number. The IRS will provide you with Federal Employer Identification Number (FEIN). The allocation of this number will help in obtaining the State Identification Number from their respective tax agency. Always use this number to obtain your state identification number from the appropriate tax agency in your state.

Payroll Information

It is important for you to calculate your employee’s (nanny’s) Gross Pay, calculate the taxes properly including the taxes withheld, and tracking the equivalent employer taxes for payments made each period.

Forms Needed to Report Nanny Tax

It is mandatory for you to provide your Nanny with the Form W-2 at the end of January each year. Report any year-end forms within your state including the Form W-3 and Form W-2 Copy A with the designated Social Security Administration.

The Documents and Information the Nanny (employee) must Provide

To report the Nanny Tax effectively, your employee is required to provide you with the following:

  • An ITIN or a Social Security Number
  • Proper Identification with Form I-9 ( the Form I-9 must be complete and accurate)
  • An accurate and complete Form W-4
  • Corresponding state income tax withholding form, if your state makes it mandatory to report income tax

The Advantages of Reporting Nanny Tax

You and your nanny can avail several benefits when you report the taxes properly. The benefit for employers is that they are entitled to tax breaks to compensate the cost of taxes. The biggest benefit is that you can have a peace of mind and not worry about any discrepancies if the IRS audits your finances. The nanny as your employee will be free from anxiety about filing for benefits. The employee will be eligible to receive advantages in the short and long term. Some of the benefits for your employee are:

  • Medicare coverage
  • Social security and retirement based coverage
  • Unemployment welfare if their job is lost without them at fault
  • An employment history that’s verifiable
  • With verified employment history, it’s easier to get automobile loan and  mortgage loans
  • Reduction in health care cost
  • Eligible for subsidies provided through the Affordable Care Act

With a little effort, you will be able to properly report your Nanny Tax to the IRS and the state to avoid many issues including penalties. You can always consult a tax return agent for more information on reporting your nanny tax the proper way.

Please let us know if you have any questions regarding the nanny tax and reporting requirements.  Chris Duncan, CPA can be reached at (843) 743-5005.


About the Author:

Chris Duncan, CPA

As a South Carolina native, Chris has spent the better part of his life in the Charleston area. Chris graduated from The Citadel with a degree in Business Administration (Accounting Concentration) in 1999.  In 2006, Chris launched his own CPA firm. For the past twelve years, Chris has worked as a local CPA and provided services to both individuals and commercial clients in a variety of industries to include accounting, bookkeeping, tax, and payroll service

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