COVID-19 has changed how working parents are handling childcare. With daycares and summer camps closed and many schools operating virtually, parents have turned to nannies and babysitters to make sure their children are cared for. 

While this approach to childcare can reduce the risk of COVID-19 transmission, it does raise an important tax issue: “nanny tax” obligations. 

The basics of nanny taxes

When you hire a nanny or babysitter, you don’t have to withhold federal income taxes from their pay unless they specifically ask you to. (And if you agree.) In those cases, you need to have the nanny fill out a Form W-4. 

However, there are other withholdings you may need to consider. 

(And remember, nanny taxes actually don’t apply to just nannies and babysitters. They can apply to other household workers, such as housekeepers, gardeners, and non-independent contractors.)  

FICA and FUTA

If your nanny earns cash wages of $2,200 or more during 2020 (excluding food and lodging), you have to withhold and pay Social Security and Medicare taxes (FICA). If the threshold is reached, all wages are subject to FICA. (Not just excesses.)

An exception to this is if your nanny is under the age of 18 and childcare isn’t their principal occupation. In that case, you don’t need to withhold FICA taxes. In these situations, you nanny is actually considered a student/part-time babysitter and there isn’t FICA tax liability.

Employers and householder workers alike have obligations to pay FICA taxes. As an employer, you would be on the line for withholding a worker’s portion of FICA and paying the matching employer amount. FICA taxes go towards the following:

• Social Security tax, paid at 6.2% by both the employer and the worker (12.4% overall)
• Medicare tax, paid at 1.45% by both the employer and the worker (2.9% overall)

Another option is to pay your nanny’s share of Social Security and Medicare taxes rather than taking it out of their pay.  

As a note, it’s still yet to be determined how these taxes are going to be impacted by President Trump’s executive order allowing employers to defer payroll taxes from September 1 through December 31, 2020.

Another consideration is the federal unemployment tax (FUTA). If you pay $1,000 or more in cash wages (excluding food and lodging) to your nanny in a calendar quarter of this year or last, you’ll have to pay FUTA. Paid only by the employer, FUTA applies to the first $7,000 of wages at a rate of 6%. However, tax credits usually reduce it to .6%. 

Reporting and paying

Your nanny tax is paid by increasing your quarterly estimated tax payments OR by increasing withholdings from your wages. That means it isn’t done as an annual lump-sum payment. 

However, you don’t have to file an employment tax return even when you have to withhold or pay tax. Rather, you’ll report these figures as part of employment taxes on Schedule H of your tax return. Make sure to include your employer identification number (EIN). If you don’t have an EIN, you’ll have to file a Form SS-4. 

The exception to this? If you own a business. If you own a business as a sole proprietor, you’ll have to include your nanny taxes on the FICA and TURA forms (940 and 941) using your EIN from your sole proprietorship. You’ll also need to give your nanny a Form W-2.

Keep records carefully

As with any tax issues, maintaining good records for all your expenses is essential. This goes for any household employee. You should hold onto your tax records for at least four years after filing. These records should include: 

• Employee name and address
• Employee Social Security number
• Employment dates
• Wages paid
• Withheld FICA or income taxes
• FICA taxes paid by you for your worker
• Copies of forms filed.

Adding nanny taxes into your financial planning might feel like an additional complication in an already complicated time. We’re here to help. Contact Smolin Lupin to learn more about how to manage the process so both you and your nanny stay in tax compliance.