What is the Nanny Tax?
The Nanny Tax is a federal (and sometimes state) tax paid by people who have household help and pay them over a certain threshold. The nanny tax applies to nannies, housekeepers, gardeners or any other household help.
The Internal Revenue Service (IRS) instituted the nanny tax because a taxpayer becomes an employer when they are consistently paying another person’s salary. The nanny tax requires taxpayers to pay social security, Medicare and federal unemployment taxes for their employees. Employers traditionally pay these taxes for their employees.
The nanny tax does not apply under a few circumstances. The first, is if the babysitter or help is the taxpayer’s parent or spouse, or if the employee is under 18 and is not in the household profession.
The taxpayer can also avoid the nanny tax by hiring household help through an agency. In this case, the agency is the employer so they would be responsible for any taxes.
Finally, if the employees are officially self-employed, then they are responsible for their own taxes.
Nanny Tax Scenario
Emily Kent is a work-at-home-mom. She hired a nanny to watch her two children for a couple of hours every day, so that she can work. Because she is incredibly busy, she also employs a house keeper, who comes once every two weeks for a few hours to help.
Emily pays her nanny over $2,000 a year, which is the 2017 threshold for the nanny tax. Therefore, Emily is required to pay nanny taxes. This means that Emily will pay the social security, medicare and unemployment taxes for her nanny.
On the other hand, Emily’s housekeeper won’t meet the $2,000 threshold. While she would fall under the umbrella of employees for the nanny tax, Emily won’t have to pay any taxes for her because she doesn’t meet the threshold. Emily’s housekeeper will be liable to pay taxes on her own.