Nanny Taxes: What You Need to Know
Prepared by Barbara Yudd

I recently hired a nanny and I don’t know where to begin with the employment tax paperwork.
Household employers must register for a Federal Identification Number, State Unemployment Tax License, and possibly a State Withholding Tax License. Also, a Report of New Hires must be provided to each state within 30 days after the first date of employment.  Household employees must complete a Form I-9 and a Form W-4 if one chooses to have federal and state tax withheld.

How can I be sure the nanny is legally able to work in the United States?
The household employee must complete Form I-9, Employment Eligibility Verification, and provide the proper documentation. Employers should keep this form in the employee’s personnel file for protection in the case of a payroll audit.

Do I need to pay Employment Taxes?
If you pay cash wages of $1,200 or more in 2000 to one household employee, you are required to withhold and pay FICA taxes. It you pay total cash wages of $1,000 or more any calendar quarter of 1999 or 2000 to household employees, you are required to pay Federal Unemployment Tax (FUTA).

Which taxes should I be with­holding from the employee’s wages?
Household employers are required by fed­eral law to withhold FICA tax at 7.65% of gross wages. While it is not required, household employers may also withhold Federal and State tax at the employee’s request.

What is FICA tax? May I choose to pay all of FICA as an added benefit to my employee?
The Federal Insurance Contributions Act (FICA) is composed of Social Security and Medicare tax. The Social Security tax pays for old age, survivor, and disability bene­fits. The Medicare tax pays for hospital insurance. If household employers prefer, they can pay both portions of FICA tax from their own funds rather than with­hold these taxes from the employee’s wages. The employee portion of FICA tax must then be added to Federal Wages for income tax purposes. However, it is not counted as Social Security or Medicare wages or as Federal Unemployment (FUTA) wages.

Do I withhold Federal and State Unemployment taxes from an employee’s wages?
No. Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA\) are both employer paid benefits. These premiums are not to be withheld from an employee’s wages.

When and how do I remit withholding and unemployment taxes?
State Withholding and Unemployment taxes are most commonly remitted on a quarterly basis. Federal and FICA with­holding and Federal Unemployment taxes are reported on a Schedule H which is pre­pared at year-end as an attached schedule to the Form 1040 due by April 15th.

Is there a special form that needs to be completed for the employee’s taxes each year?
Yes, A Form W-2, Wage and Tax Statement, must be received by the employee no later than January 31st to report wages and taxes withheld. There are also employers tax filing requirements at year-end for the Social Security Administration. Most household employers find that hiring a professional tax consultant is very helpful when it comes to year-end compliance and complicated taxes forms.

Should I hire a nanny tax service or can I handle these tax obligations on my own?
This is a personal choice. With the tax laws changing so frequently, most families find that they do not have a complete understanding of the current payroll tax laws to handle these tax matters in a com­pliant manner. Most families simply do not have the time to handle these tax issues on their own, and choose to hire a professional tax consultant.

What does a tax consultant do to take the burden off the household employers?
Tax consultants offer a variety of service options ranging from license registration preparation only, to a complete quarterly tax compliance and payroll service. Most clients choose to have the consultant com­plete the registration forms along with all quarterly and annual tax compliance. Official state tax returns are sent to the employer and then forwarded to the con­sultant for completion each quarter. Forms W-2, W-3 and Schedule H are prepared at year-end for these clients as well.

Household Employment Taxes - Are You Compliant?
By Barbara Yudd

Many families hire nannies, housekeepers and other domestic employees to provide private services in their homes. Household employers may not be aware of the federal and state tax responsibilities that go along with hiring such employees. While some organizations, such as nanny placement firms include payroll and tax planning advice in their scope of services, most do not.

The following are some highlights of the requirements that household employers must address once an employee is hired:

• Register for Federal and State Identification Numbers
• State New Hire Reporting
• Paycheck Calculation
• Quarterly Tax Compliance
• Year-End Tax Compliance

As 2000 comes to a close, the year-end payroll process will begin. Household employers need a clear understanding of the withholding tax process in order to prepare year-end tax compliance correctly. In addition to regular quarterly compliance, year-end requires additional reporting require­ments as follows:

Form W-2 Wage and Tax Statement must be distributed to employees by January 31st. This statement reflects earned wages, Medicare tax and Social Security tax withheld, Federal and State wages, and withholding tax, if applicable.

Form W-3 Transmittal of Wage and Tax Statement must be submitted to the Social Security Administration by February 29th along with Copy A of Forms W-2.

Schedule H, Household Employment Taxes is submitted with employer’s personal Form 1040 by April 15th. Schedule H reflects wages paid, Federal withholding taxes, FICA (Medicare and Social Security) taxes withheld and matched, and Federal Unemployment (FUTA) taxes. These tax figures are then carried over to Form 1040, increasing total tax liability for the year.

If the IRS determines that a balance owed on Form 1040 is the result of the household employment situation, a penalty may be charged. In order to absorb the total tax liability incurred throughout the year for the employee, household employers are encouraged to either increase quarterly estimated tax payments, or increase withholding tax with their employer.

It should be noted that Federal and State unemployment premiums are employer-paid benefits, and are not withheld from the employee’s wages.

Also, as mentioned above, FICA withholding tax must be matched by the employer. Contributions for unemployment premiums and FICA taxes begin again each January 1st for each employee.