Nanny taxes don't apply only to the nanny who cares for your children. The term covers all household help, such as gardeners, housekeepers, and anyone else who works in your home under certain conditions. If you pay a worker more than $1,800 a year (in 2012) you may have to address the issue of nanny tax withholding.
Nanny Taxes Apply to Employees
Your obligation to pay a nanny tax depends a great deal on whether you control an individual's work hours. The nanny tax does not apply to anyone who works for you periodically and who controls when and how the work is done. For example, if you hire someone to mow your lawn, you probably wouldn't tell this person at what hour of which day the work must be done. The mower just shows up and does the work. In this situation, what you pay the worker is not subject to the nanny tax. If you hire a babysitter so you can go out for the evening, the sitter will do so if the sitter is available. This worker is not technically an employee. However, if you ask someone to sit every Monday, Wednesday, and Friday during certain hours, the IRS would probably consider this person an employee.
You Must Withhold Taxes
The nanny tax is actually three taxes: Social Security, Medicare, and federal unemployment. You must withhold two of these three taxes. As of 2012, the amounts are 4.2 percent of wages for Social Security and 1.45 percent for Medicare. You don't, however, have to withhold unemployment. You pay this separately. You need not withhold federal income tax from your household employee's pay.
You Must Pay Your Portion of the Taxes
You must also contribute toward your employee's Social Security and Medicare taxes. In 2012, employers must pay 6.2 percent in Social Security tax. They must match their worker's Medicare tax at 1.45 percent. Additionally, employers are responsible for paying the federal unemployment tax. Therefore, if you agree to pay your housekeeper $500 week, the employee will actually cost you at least $538.25. You must pay an additional $31 toward Social Security, or 6.2 percent of $500, and $7.25 in Medicare tax, or 1.45 percent of $500. Unemployment tax typically works out to about 0.8 percent after certain available tax credits, but you must factor this in as well.
Some Workers Are Exempt
You're not required to pay a nanny tax for everyone who works for you. You can pay your spouse or your child without worrying about Social Security and Medicare, as long as your child is younger than 21. You don't have to pay a nanny tax for workers younger than 18 as long as providing household services is not the employee's principal occupation.
A Tax Lawyer Can Help
The law surrounding payment of taxes for nannies and other household help is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.