Household Employment Taxes, frequently referred to as the Nanny Tax, are taxes that individuals must pay when they hire workers to perform household services. This includes nannies, babysitters, housekeepers, gardeners, caregivers, and similar roles. These taxes cover key employee benefits such as Social Security, Medicare, and unemployment insurance, ensuring that household workers receive protections similar to those in traditional employment.
Why Do Household Employment Taxes Exist?
The primary purpose of Household Employment Taxes is to extend Social Security and Medicare benefits, along with unemployment insurance, to workers employed in private homes. Even if you are not running a business, when you hire someone as a household employee, the government treats you as their employer for tax purposes. This system helps workers earn Social Security credits and qualify for unemployment benefits should their employment end.
The term “Nanny Tax” is widely used because nannies represent a common example of household employees. However, these tax rules apply broadly to any household worker meeting certain payment thresholds.
Who Must Pay Household Employment Taxes?
If you pay a household employee $2,600 or more in 2023 (the threshold may be adjusted annually for inflation), you are responsible for complying with Household Employment Tax requirements. This includes anyone hiring nannies, babysitters, housekeepers, gardeners, personal drivers, or caregivers. Payment can be made via cash, check, or direct deposit, but regardless of method, tax responsibilities apply when thresholds are met.
Breakdown of Household Employment Taxes
- Social Security and Medicare Taxes (FICA): Employers must withhold 7.65% of wages from their employee and also pay an equal 7.65% themselves.
- Federal Unemployment Tax Act (FUTA): This tax is paid solely by the employer, typically 6% on the first $7,000 of wages, though credits may reduce the effective rate.
- State Unemployment Insurance (SUI): Rates and requirements vary by state; often employers pay these taxes.
- Income Tax Withholding: This is optional but can be agreed upon by employer and employee.
Employers report and pay these taxes using IRS Schedule H, which is filed along with their federal income tax return.
Example Scenario
If you pay a nanny $500 per week, totaling $26,000 annually, you must withhold her portion of Social Security and Medicare taxes (7.65%), match that amount as the employer, and pay FUTA taxes on the first $7,000. Failure to fulfill these tax responsibilities can result in penalties and interest.
Important Responsibilities of Household Employers
- Maintain clear payment records: Document wages, hours worked, and taxes paid.
- Obtain an Employer Identification Number (EIN): This is required to file employment taxes.
- Provide Form W-2: Employers must give their household employees a W-2 form showing wages and taxes withheld.
- Use payroll services if needed: Many services specialize in household employment taxes to simplify compliance.
- Check state tax laws: State unemployment and disability insurance requirements vary.
Common Misconceptions
- Family members are exempt: Hiring relatives does not always exempt you from these taxes.
- No taxes if paid under threshold: While true for that year, cumulative pay could trigger liability.
- Too complex to comply: In reality, IRS enforcement is strict, and penalties can be substantial.
Household Employment Taxes Summary Table
| Tax Type | Rate/Amount | Paid By | Applies To |
|---|---|---|---|
| Social Security Tax | 6.2% up to wage limit ($160,200) | Both Employer & Employee | Wages up to annual limit |
| Medicare Tax | 1.45% on all wages | Both Employer & Employee | All wages |
| Federal Unemployment Tax | 6% on first $7,000 | Employer only | First $7,000 in wages |
| State Unemployment Tax | Varies by state | Employer only | Varies by state |
Resources & Further Reading
- IRS Publication 926: Household Employer’s Tax Guide
- IRS Tax Topic 756: Household Employer’s Tax Responsibilities
- IRS Guidance: Social Security and Medicare Tax for Household Employers
For those managing household employment taxes, staying informed and organized helps avoid costly mistakes. Proper compliance protects your household employees’ benefits and shields you from IRS penalties. Consider this tax responsibility a part of professional household management. For broader financial planning related to caregiving, explore our article on Dependent Care Flexible Spending Account (FSA).
