Do I have to withhold taxes from my nanny's pay?
No, you can choose to pay your nanny's social security and Medicare taxes on her behalf. And your nanny can choose whether or not to have you withhold income tax.
How much will I owe?
FICA and Medicare taxes total 15.3% of your nanny's pay. You can withhold 1/2 of this from your nanny's pay, or you can choose to pay the entire amount. You will also pay federal unemployment tax of up to $56 per year per employee. Important update: the FICA tax has been temporarily reduced to 7.65 (your share) + 5.65 (nanny's share) = 13.3%.
California payroll tax is usually about 3.5%. The state will assign a rate to you, which will change each year.
How do I pay what I owe to the government?
It's easy. Just one extra page, Schedule H, with your federal tax return. Schedule H calculates how much social security, Medicare, and federal unemployment insurance you owe. The amount is added to your regular taxes and paid all together. If you think that you will be underpaid at the end of the year, you should increase your quarterly tax payments or salary withholdings to avoid penalties.
California also has an annual payroll report, DE 3HW, which is mailed separately from your state tax return, together with a check for the state payroll taxes.
Burlingame - San Mateo - Foster City CPA Since '88
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Nanny Taxes
Is my nanny my employee?
If you tell your nanny when to work, what to do, how to do it, and you provide all of the supplies, she is almost certainly your employee. This means that the amounts you pay her are subject to payroll taxes. Whether she is part-time, full-time, hourly, salary, or referred to you by an agency does not impact your nanny's status as your employee. But a childcare provider who works from her own premises is not your employee. And a housekeeper who sets her own hours, cleans for other people, and provides her own supplies is also not your employee.
What do I need to do first?
You will need a federal employer tax i.d. number. It’s simple and free. Just fill out Form SS-4 and read the information to an IRS clerk.
You will also need to obtain a California state i.d. number by filing Form DE 1HW. Be sure to mark “yes” on item L, which means that you want to file a state payroll tax return only once each year and pay the tax at that time.
What else do I need to do?
If you pay your nanny more than $1,700 during the year, or she chose to have you withhold income tax from her pay, you must send her a Form W-2 by the end of January. I recommend that you have your tax person prepare this form and send it, with the Form W-3, to the Social Security Administration. It is important that you obtain your nanny's full name, address, and social security number up front, since there are penalties for failing to file the Form W-2 or for filing with incorrect or incomplete information. (The $1,700 threshold jumps to $1,800 in 2012.)
More information
Both the IRS and the California EDD have publications which explain the rules regarding payroll taxes for nannies and other household workers: Publications 926 and DE 8829.
If you have questions / comments, or would like to enlist the tax services of an experienced CPA, please contact me.
M. Bess Kane, CPA bess@besskanecpa.com
January, 2012
