Nobody likes to pay more in taxes than they have to. Yet the worst time to get dinged for extra taxes is in a situation where you'd least expect to have to pay them.
One area that snares many unsuspecting taxpayers is the household employee tax. Better known as the nanny tax, this provision requires you to pay additional taxes when you hire someone for household work. Despite its name, the tax doesn't apply only to nannies, but rather to a wide range of people who do work for you in your household.
The basics of the nanny tax
The general idea behind the nanny tax is that the federal government wants to make sure it collects the same employment taxes for household employees that it does for regular businesses. Accordingly, if you have a household employee and pay more than the appropriate thresholds, then you'll have to pay the combined amount of employment taxes allocable to both the employee and the employer.
A wide range of household employees are included in the scope of the tax. Babysitters and caregivers often qualify as household employees, but you can also owe money for workers in occupations such as housekeeping, gardening, maid service, and others who work in and around your private residence. In addition, family members like a spouse, children under 21, parents, and anyone under 18 who's a student don't invoke the requirements of the nanny tax.
How much can I pay before the nanny tax kicks in?
For 2018 and 2019, there are two income thresholds that affect when the nanny tax becomes due. The first involves Social Security and Medicare taxes, and if you pay a household employee wages for the year that exceed $2,100, then you'll also need to pay the tax. That includes the employer tax of 6.2% for Social Security and 1.45% for Medicare. You'll also need to cover the matching amounts for the employee, although you have the option of withholding that amount from what you pay your household employee if you want.
The second income threshold is important for federal unemployment taxes. If you paid a household employee more than $1,000 in any single quarter of either the current year or the previous year, then you'll need to pay unemployment tax on the first $7,000 in cash wages you pay the employee. The tax rate is 6%, although you'll need to coordinate with state unemployment and labor rules to determine whether a portion of that amount gets paid to the state and then credited against what you owe the IRS.
How do I figure out the household employment tax?
IRS Schedule H to Form 1040 helps people figure out how much they owe in household employment taxes. Even if you're not otherwise required to file a tax return, you'll still have to file Schedule H to report any taxes you owe for household employees.
What can I do to pay less nanny tax?
If you don't want to have to pay household employment taxes, there are several things you can do:
- Bring on independent contractors when possible rather than hiring employees.
- Make sure you stay under the $2,100 and $1,000 limits for total payments that trigger the tax.
- Use qualifying family members to take care of household tasks for which you'd have to pay household employment taxes if you had others do the work
Finally, though, don't expect that you'll get away with it if you don't report your household income. Not only does it run the risk of the IRS discovering the situation, but household employees themselves also have an incentive to make sure you've handled things correctly. In order to get credit for their work for Social Security purposes, household employees need to ensure that you've reported it to the federal government -- and that typically happens through the payment of the household employment tax.
You might not think of yourself as being an employer, but if you have people do work around the house for you, then you might well be a household employer. In that case, paying the nanny tax is important in order to avoid bigger problems with the IRS.