Nanny tax is one of the tax laws that can jump up and bite you in unexpected places.
Do you have a household employee such as a nanny, a caregiver for an elderly relative who moved in with you during the pandemic, or a live-in housekeeper?
You may have hired somebody to help out during difficult circumstances caused by the COVID-19 mess.
Maybe that was a temporary arrangement, or maybe it has turned into a permanent one. In either case, the dreaded nanny tax issue may be in play.
The nanny tax refers to your duty to withhold and deposit a household employee’s share of Social Security and Medicare taxes on wages paid to the employee and also to deposit the employer’s share of those taxes.
Q1-Do You Have a Household Employee?
First, let’s clarify who can potentially count as a household employee. According to IRS Publication 926, Household Employer’s Tax Guide, household employees are individuals who do household work—such as performing as a nanny, caretaker, private nurse, babysitter, housekeeper, maid, driver, or butler. Household work includes only performing services in or around your private home.
According to IRS Publication 926, a person who does household work is your employee if you control not only what work is done but also how the work is done. So, if a worker regularly comes to your home on a schedule dictated by you and is supervised by you, the worker is probably an employee.
It doesn’t matter whether the work is full-time or part-time, or whether you hired the worker through an agency. But if an agency supplies the worker and controls what work is done and how it’s done, the worker is not your employee.
Yard care workers, pool service guys, maids, and the like who provide services to the general public and just show up at your place periodically to go about their business are not your employees.
Q2-If I Have a Household Employee, What Are My FICA Tax Obligations?
For 2021, the FICA tax issue arises only if you pay a household employee $2,300 or more during the year. If you cross that threshold, the Social Security tax rate is 12.4 percent on all cash wages (including the first $2,300) up to $142,800. As the employer, you withhold 6.2 percent from the employee’s wages and pay the other 6.2 percent out of your pocket.
The Medicare tax rate is 2.9 percent on all cash wages (including the first $2,300). As the employer, you withhold 1.45 percent from the employee’s wages and pay the other 1.45 percent out of your pocket.
Exception. The FICA tax does not hit wages paid to a household employee under age 18 at any time during the year—unless providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation, so there are no FICA tax concerns in that case.
Q3-What Are My FUTA Obligations?
For 2021, you owe FUTA(Federal Unemployment Tax Act) only if you pay cash wages of $1,000 or more to a household employee during any calendar quarter this year or if you did so during any calendar quarter in 2020.
Q4-What About Noncash Wages?
For federal income tax withholding purposes (if you choose to withhold federal income tax), and for the amount of wages reported on your household employee’s Form W-2, you generally must include both cash and non-cash compensation.
You measure the value of any non-cash wages based on the fair market value of what you provide. But IRS Publication 926 says the following types of non-cash compensation don’t count as taxable wages:
- Meals you provide to the household employee at your home for your convenience
- Lodging you provide to the household employee at your home for your convenience and as a condition of employment
- For 2021, up to $270 per month for transit passes so your household employee can commute to your home
- For 2021, up to $270 a month to reimburse your household employee for parking at or near your home or at or near a location from which the employee commutes to your home
Q5-What About Wages Paid to a Relative or Child?
Unless otherwise noted, payments to the following individuals for providing household services don’t count as wages for FICA tax or FUTA purposes:
- Your spouse
- Your under-age-21 child
- Your parent, unless (1) the parent cares for your child who is under age 18, or who has a physical or mental condition that requires personal care, and (2) certain other conditions apply
Wages paid by you for any reason to your spouse, under-age-21 child, or parent are exempt from FUTA.
Key point. While wages paid to the above individuals are exempt from the FICA tax and FUTA, they count as
taxable wages for federal income tax purposes unless one of the other exceptions explained earlier applies.
Takeaways
The nanny tax rules are complicated, and complying with them can be a time-consuming nuisance. Nobody will blame you if you hire a payroll service or a tax pro to take care of this stuff. Money well spent!
Your cleaning, lawn care, and pool people do not subject you to the nanny tax when they provide their own supplies and equipment. That’s good news!
If you would like to discuss the nanny tax, please call me on my direct line at 509-543-7600 or send a request HERE.
June 2021
This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. TaxMedics does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. Please contact us directly to discuss how this information may be used based on your actual facts and circumstances.