The nanny tax: What every household employer must know

While you are not required to withhold federal income taxes from your employee’s wages, as a household employer, you may choose to do so if the employee requests it. In such cases, the employee should complete a Form W-4. Additionally, you may be obligated to withhold Social Security and Medicare (FICA) taxes and pay federal unemployment (FUTA) tax.

2024 and 2025 thresholds
In 2024, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,700 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount will increase to $2,800 in 2025. If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and childcare is not his or her principal occupation, you do not have to withhold FICA taxes. So, if you have a part-time student babysitter, there is no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you are responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments are not counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Making payments
You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As an employer of a household worker, you do not have to file employment tax returns, even if you are required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, include your employer identification number (EIN), which is not the same as your Social Security number. You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) you file for the business. And you use your sole proprietorship EIN to report the taxes.

Maintain detailed records
It is important to retain tax records for a minimum of four years, starting from the later of the tax return’s due date or the date the tax was paid. These records should include the employee’s name, address, Social Security number, employment dates, wages paid, taxes withheld and copies of forms filed.

Consult with your Rudler, PSC advisor for assistance or if you have questions regarding how to comply with these requirements. Contact us at 859-331-1717.

The nanny tax: What every household employer must know

Hiring household help, such as a nanny, housekeeper or gardener, can provide substantial relief in managing childcare and daily household tasks. However, as an employer, it is essential to understand your tax responsibilities, often referred to as the “nanny tax.”

RUDLER, PSC CPAs and Business Advisors