Nanny Tax

What Is a Nanny Tax?

A nanny tax is a federal tax paid by individuals who utilize household employees and pay wages over a certain amount. In 2021, for cash wages of $2,300 or more per employee, social security and Medicare taxes must be kept at a rate of 15.3%, with the employer and employee each paying half (7.65%). In the event that paying cash wages of $1,000 or more per quarter per employee, the employer pays a 6% unemployment tax on annual cash wages up to $7,000.

Understanding the Nanny Tax

Household employees are hired people whose work is controlled by the employer; such employees incorporate sitters, babysitters, head servants, and cooks. The nanny tax exists on the grounds that the IRS considers a continuous household aide as the taxpayer's household employee, as opposed to an independent contractor. Accordingly, the taxpayer turns into an employer and must pay Social Security, Medicare, and federal and state unemployment taxes on the wages paid to that employee. There might be state-level nanny taxes, too. The federal and state nanny tax requirements are definite in IRS Publication 926.

For instance, in the event that a taxpayer pays a grown-up sitter $50 consistently, they must pay nanny taxes (52 ends of the week/year x $50 = $2600). The nanny tax doesn't have any significant bearing assuming that the sitter is the taxpayer's parent or spouse or on the other hand in the event that the sitter is younger than 18 and isn't principally engaged in the household employment calling. Nanny taxes likewise aren't applicable on the off chance that a taxpayer hires household help through an employment agency, in which case the agency is the employer and is responsible for paying the associated tax.

The nanny tax empowers a household employee to receive covered employment benefits and protections, like Social Security, Medicare, and unemployment benefits. It likewise gives a household employee an evident income and a legal employment history, which can be important while applying for a credit card, loan, or mortgage. The nanny tax likewise permits an employer to exploit huge tax savings from a Flexible Spending Account and the Child and Dependent Care Credit.

Nanny Tax Requirements

Taxpayers with household employees must file to turn into an employer and receive an employer identification number for dealing with the IRS and different agencies. Inability to pay employment taxes can bring about punishments, and families who misclassify a household employee as an independent contractor can be accused of tax evasion.

In 2021, the withholding amount for Social Security taxes was set at 6.2%, and the rate for Medicare taxes is 1.45%, which amounts to a total of 7.65% kept from all cash wages. The employee and employer are responsible for paying 7.65% each, yet a few employers decide to pay the total 15.3% tax.

Those searching for help around the house might be frustrated to discover the intricacies of keeping up with tax compliance. Luckily, there are a lot of nanny payroll services that can assist with mechanizing some or all of the payroll cycle.

Features

• The nanny tax qualifies household employees to receive certain benefits and protections, like Social Security, Medicare, and unemployment benefits.
• A nanny tax is a federally required tax paid by individuals who utilize household employees and pay wages over a certain threshold.
• The IRS considers a continuous household partner as a household employee, instead of an independent contractor.
• Employers and employees pay an equivalent share of social security and Medicare taxes (7.65% total) on cash wages.