Household employer payroll: The ultimate guide for nanny tax and the household employer

Nanny payroll is quite confusing and especially for the first time household employer.

But why do we need to know about nanny payroll?

We can all agree that finding time to balance our numerous responsibilities isn’t easy.

Between work, shuffling kids to and from school , as well as all your other various commitments, getting through the day can feel like a  juggling act. 

It’s difficult to find time to fit all those tasks in one day, which is why many people hire household help, commonly called nanny help.

But did you know that being a domestic (or household) employer can actually make you subject to paying a Nanny Tax? Even if you pay the person in cash. 

Even more importantly, carefully documenting your household employer payroll can make all the difference in the event of an audit or other mishap.

So what exactly is this tax and how does it work? Keep reading to find out.

What is the nanny payroll and nanny tax?

If this is your first time hearing about the nanny payroll or even nanny tax, you are not alone. 

However, there are a few reasons why it’s really important to know what this tax is. You also need to know how this tax affects Nanny Payroll.

But first thing’s first: Nanny tax isn’t just applied to Nannies (I know, obvious, but stay with me).  

While nannies and babysitters make up a portion of those affected by this tax, they are just a small chunk. 

According to the IRS, other workers to which household employer rules apply, and hence nanny tax applies includes:

• Housekeepers/cleaners
• Cooks
• Gardeners/ yard workers
• Caretakers and Private Nurses
• Drivers

The list goes on–but essentially, if you hire a household employee you’re most likely subject to nanny tax, also called household employment tax. 

But does this mean that you have to pay nanny taxes on every service that’s done in your home? 

Nope.

Only certain kinds of workers count. Knowing the distinction will help a lot.

So, who is classified as a household employee?

It doesn’t make a lot of sense to take taxes out of the wages of every service person who does in work in your house.

If you did, you’d end up wasting a lot of time and accruing a ton of frustration.

Which is why the IRS doesn’t require YOU to pay taxes on services provided to you by an independent contractor. 

However, failure to account for the Nanny tax in the right circumstances can lead to serious charges like tax evasion.

That’s why it’s important to  know what the distinction implies. 

An independent contractor is someone who usually provides their own tools and determines how the job is done. 

Differentiating between Contractors and Employees can be daunting. Read the complete guide in this blog post.

On the other hand, a household employee is someone who YOU provide with the resources to do the job as well as the full instructions as how to get it done. 

In-home baby sitter vs day care

For example, imagine a baby sitter you hire to take care of your children while you’re at work. 

Everyday, this babysitter comes to your home at the specific time you request, makes your children breakfast, takes them to school, brings them home from schools, etc. Besides that, the babysitter also takes the children to activities and after school functions upon your request. 

This person would fall under the category of household employee. Reason? Because you are essentially providing all (or most) of the resources as well as instructions on how the job is to be done. 

However, if you were to drop your kids off at a babysitters house or at a daycare before work, then this caretaker would fall under the category of independent contractor. 

Why? 

Because they provide all the resources for themselves and don’t rely on your instructions to get the job completed. 

Additionally, Nanny taxes don’t apply to you if the household employee just so happens to be your spouse, child, or parent, or an individual under the age of 18.

How to determine which taxes apply to nanny payroll

So how does all of this affect nanny payroll? 

Well, it’s an important determinate as to what taxes (if any) you’ll owe the IRS. In a lot of ways, nanny payroll is subject to same taxes as regular employers. The difference is being in the way the taxes are remitted to the government.

If you plan to pay more than $1800.00 in household employer wages, you must withhold employment taxes. These are then reported in your Form 1040 Schedule H.

Such nanny taxes include your specific state taxes plus the Federal taxes below.

• Income tax (optional – discuss with your payroll professional)
• Social Security
• Medicare
• Unemployment 

The household employer does not have to make tax deposits and file Federal quarterly tax returns like regular employers. He could, nevertheless, make estimated tax payments under his social security number and take credit when filing form 1040.

How to process nanny payroll and report nanny taxes

At the end of the year, your payroll service provider should issue you with Schedule H. This form summarized the different taxes withheld. This Schedule H is then keyed in to your 1040 tax return.

You don’t HAVE to withhold federal incomes taxes from wages if you don’t want to. Both you and your employee have the option to discuss this matter and reach an agreement. 

The tax software therefore computes the tax liability as shown on your Schedule H and adds the tax liability to your regular 1040 ta liability. 

Remember the household employer must match the employee’s Social Security (6.2%) and Medicare (1.45%). This applies to all wages paid to the employee subject to limits. The employer also pays FUTA (Federal Unemployment Tax) of 6.00% for the first $7,000.00.

For Household employers, FUTA only applies if you paid $1,000.00 or more in wages.

In addition, employees that make over $200,000 in a year must have a 0.9 percent Additional Medicare Tax withheld as well. 

Conclusion

While figuring out taxes is never easy, taxes associated with nanny payroll is especially difficult.

It’s not as common a topic as filing a 1099 or itemizing deductions, so being uncertain is completely normal. 

The thing to keep in mind is that these employment taxes are incredible critical, since not only can they affect you but also those that work for you.

If you’re not sure, don’t be hesitant to seek help. Spending money on actual nanny payroll is guaranteed to save you a lot more money in the long run. 

Getting these employment taxes done (and done right) can save you potential legal fees, fines, penalties and not to mention the hassle of an audit. 

So take the time to discuss the matter with your employee as well as a tax professional. In the long run, it’s a step you won’t regret.