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Do You Need To Pay Nanny Taxes?

Most of my clients have been working remotely during the pandemic.  And many say that they will continue to do so for 2021.  Families with small children are struggling to do their full time jobs and to find child care that works for them.  I have clients that have decided to hire a nanny for the first time, and they have questions about how to pay the FICA taxes on the amount they are paying the nanny.  Some clients are not even aware that they need to do this, and are surprised that they need to think about this.

Nanny taxes are social security and medicare taxes (FICA), and you are legally required to withhold these if you pay more than $2,200 in the calendar year 2020. The bad news is that you are responsible for half of these taxes, or 7.65% of the wages.  If you do not withhold these taxes, the IRS will expect you to pay the full amount or 15.3%. 

Household employers are also responsible for paying the FUTA if they pay the employee any more than $1,000 per quarter in 2020, up to $7,000 per year. This works out to an additional 6% on the first $7,000 that you pay your nanny for the year.  This tax is solely on the employer, so you cannot withhold it from the nanny's pay. 

You may also have to pay state unemployment taxes as well, so it is a good idea to check with your tax preparer in your state to determine what your obligation is.  

There are some forms that need to be completed prior to your nanny's start date.  The Form I-9, or Employment Eligibility Verification needs to be completed to make sure that your employee is legally able to work in the U.S.  You will also need a Federal EIN number to begin paying the nanny tax.  If you will be withholding income tax, you will need to also complete a W-4 form. When tax time approaches, you will also have to provide the nanny with a W-2 form to reflect the payments you have made over the course of the year.

Many people feel overwhelmed with having to deal with the IRS on a regular basis.  There are a couple of services that will do your household payroll for you.  One is NannyChex, and another is NannyPay.  Paying nanny taxes can seem intimidating, but you can choose to do this on your own or use a service that can do this for you. Many people are surprised that they are obligated to pay these taxes on top of the wages they are already paying, and fail to budget in these costs when looking at childcare alternatives.

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her client