The combination of payroll taxes withheld from a household employee and the employment taxes paid by their employer are commonly referred to as the nanny tax. Under current law, any family or individual that pays a household employee more than $2,000 a year must withhold and pay Social Security and Medicare taxes, also known as FICA. The law mandates that all domestic workers, such as cooks, nannies, housekeepers and gardeners, are subject to the nanny tax.
What is ‘Nanny Tax’
A federal tax that must be paid by people who hire household help (a babysitter, maid, gardener, etc.) and pay them a total of more than a specified threshold amount during the tax year. The reason the IRS charges the nanny tax is because it considers an ongoing household helper to be the taxpayer’s employee. As such, the taxpayer becomes an employer and must pay Social Security, Medicare and federal unemployment taxes on the wages paid to that employee. There may be state-level nanny taxes as well.
Explaining ‘Nanny Tax’
The nanny tax does not apply if the babysitter is the taxpayer’s parent, spouse, or if the babysitter is under 18 and is not primarily engaged in the household employment profession. Another way for taxpayers to avoid dealing with the nanny tax is by hiring household help through an agency. The agency will then be the employer and be the one who pays the nanny tax. Also, if household helpers are officially self-employed, they will be responsible for paying their own taxes and the taxpayer will not have to worry about the nanny tax.
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