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What You NEED to Know About Nanny Taxes

November 1999

Should you be paying nanny taxes this year? The correct answer may surprise you. The revision of the "Nanny Tax" legislation in October 1994 gave taxpayers a somewhat false sense of security. Congress did make some improvements to the rules governing the reporting and remittance of nanny taxes. For example, the wages paid to teenage babysitters are now exempt, as well as most other household services provided by those aged 18 or younger. However, Congress substantially raised the risk and penalties for noncompliance with one deceptively simple change--the incorporation of the federal nanny taxes on the employer's personal income tax return. "Failure to report household employee wages and pay social Security and Medicare with [your] annual personal income tax return could result in penalties and interest. A willful violation of these rules," warns George Schutzer, a tax partner at Patton Boggs, LLP, a Washington, DC law firm, "could be considered criminal fraud and subject the violator to fines or imprisonment."

State reporting rules did not change with this legislation. Most household employers are still required to do wage reporting to their state on a quarterly basis. The paperwork was improved, but not eliminated.

Just exactly who is responsible for the nanny taxes?
Nanny employers are not the only people faced with this issue. Most people who engage a worker to perform domestic services in their private residence become employers. Employment taxes are due for housekeepers, companions, home health aides and other domestic workers. Congress estimates that there are between 2-2.5 million household employers in the US today, and only 500,000 of them actually paid these taxes in 1994. If you pay $1700 (2009)or more in total wages to a household worker in 2009, you are responsible for the social security and medicare taxes, as well as providing Form W-2 to the worker. If you pay [or will pay] $1000 or more in total wages in any calendar quarter within the last two years, you also become responsible for unemployment taxes, both federal and state. Income taxes, on the other hand, are generally the obligation of the domestic worker, although many employers agree to do the income tax withholding and remittance for the worker.

[NannyNetwork.com Note: The wage that triggers a Social Security/Medicare tax obligation has steadily increased. From 1995-1997 it was $1000/year; 1998-1999 $1100; and 2000 $1200; 2001 - 2002 $1300; 2003 - 2005 $1400; 2006 - 2006 $1500; 2008 $1600, 2009 - 2010 $1700]

How much money are we talking about?
The average salary of a full time nanny is $420 per week (1999), over $21,800 per year, according to Kathleen Webb of HomeWork Solutions, a nationwide provider of nanny tax services to employers (800-NANITAX). Webb reports that "Social Security and Medicare taxes on that amount are $3,300 a year. Add on Federal Unemployment Tax (FUTA) and State Unemployment Taxes and you can owe $3,600 or more."

[NannyNetwork.com Note: The average full time nanny wage was $620/wk. (~$14/hour) and Social Security & Medicare taxes on the 2008 wage is $4932.]

"Employers are shocked when we itemize the taxes they are responsible for, particularly when they realize they're responsible for remitting both parts of the Social Security and Medicare contributions," Webb says. "Then, many discover that their unmarried nanny owes about $1,500 in federal income taxes and perhaps another $400-700 in state income taxes. When April 15 comes along, they aren't prepared for any of this."

How do you go about paying the nanny taxes?
There are a number of steps to be taken just to get started paying the household employment taxes. You will need to consider the following:

  • You must have Federal Employer's Identification Number. Call 1-800-TAX FORM to request Form SS-4 and Publication 926 Employer's Guide.
  • Unemployment Taxes: State wage reporting and most state unemployment tax remittances are required quarterly. New employers must register with the state to obtain a state reporting number.
  • Withholding Taxes: Most states require quarterly reports and remittances of withheld income taxes, as well as an annual reconciliation.
  • Provide your employee with Form W-2 Wage and Tax Statement no later than January 31. You may obtain these forms by calling 1-800-TAX FORM. Mail copies of Form(s) W-2 and Form W-3 (if required) to Social Security Administration by February 28. There is a fine for late submission.
  • Calculate your Federal Employment Tax Liability, including Social Security, Medicare, Withheld Income Taxes, and Federal Unemployment Taxes. Complete Schedule H and remit taxes due with the Form 1040 no later than April 15.

If you're feeling overwhelmed with all this information, you're not alone. Webb reports that demand for her company's payroll and tax services is strong. "We assist domestic employers across the United States with these filings, calculations, and resultant correspondence," says Webb. HomeWork Solutions, Inc., of Sterling, VA, introduced its NaniTaxsm and NaniPaysm services in 1993 and offers a variety of service levels (800-NANITAX). They can help you identify which taxes, if any, you owe, and how and when to pay them. As Kathleen Webb points out, "it is far better to pay the appropriate taxes today, then to pay the taxes AND the penalties later."

About the author:
Lisa B. Mears is a free lance writer and the owner of the desktop publishing firm Bookman Graphics, Sterling VA. She is the mother of three children.