Here’s a snapshot of what you must do to steer clear of trouble with the IRS when you hire someone to take care of your children in the home. The trouble is that not paying the “nanny tax” is considered income tax evasion.
If you have household workers, you are required 
to withhold and pay Social Security and Medicare tax (FICA) taxes if cash wages paid total $1,800 or more. As an employer, you will need to obtain an Employer Identification Number (EIN) by filing IRS Form SS-4 (an EIN is not the same as your social security number). You must report and pay the required employment taxes for these domestic employees on Schedule H (Household Employment Taxes) which is included as part of your IRS Form 1040. The FICA tax you owe is paid along with your regular income tax bill. There is one limited FICA exception for wages paid to domestic employees who are under 18 (the so-called baby-sitter exception). FICA tax doesn’t apply to these employees if domestic work is not their principal occupation. This exception may help with steady evening and weekend baby-sitters.
You must pay the federal unemployment tax (FUTA) for any household employee whom you pay $1,000 or more in a calendar quarter. In addition, states have their own unemployment tax withholding and filing requirements which can vary significantly from the federal rules.
You aren’t required to withhold federal income tax from the wages of household employees. But you are required to file a Form W-2 for every domestic employee whose wages are subject to the social security tax. Although you are not required to do so, your household employee may ask you to withhold federal income tax.
If you pay the nanny’s share of Social Security taxes in addition to your share rather than have the nanny incur that expense, you or the nanny won’t need to pay additional social security taxes on that amount. The nanny, however, will be considered to have additional income for income tax purposes.
For those taxpayers who limit the usage of household help to make sure that they do not exceed the federal income tax reporting thresholds and the above compliance, be sure to check what the state reporting rules are as you may run afoul of those reporting requirements.
Other notes of caution include making sure that you are in compliance with (1) the federal and your state minimum wage rules when you establish your hourly rate; (2) Dept. of Labor I-9 requirements; (3) state New Hire requirements; (4) state personal income tax withholding requirements; and (5) any requirements to verify SSNs. You should also check with your insurance agent about your policy coverage for domestic employees and if you need to provide workers compensation insurance coverage.
The author wishes to thank the National Society of Accountants and CCH Incorporated for their contributions.
Please be sure to read the disclaimer page on our blog. This blog is for educational purposes only and should not be considered as the rendering of tax advice.
