How to Pay Nanny Taxes Yourself

If you pay your nanny or child-care provider more than $2,100 in calendar year 2018, the IRS expects you to pay what’s known as the “nanny tax.” And that’s not all: Depending on where you live, you’ll incur obligations to your state as well. (We recommend reading up on the state-specific payroll and tax laws in your area.) While many families choose a managed solution over the hassle of personally setting up and managing a caregiver’s payroll and tax paperwork, it’s not impossible to do it yourself. 

But before you dive in, it’s a good idea to understand all the steps that are required. This year-round process involves a bit of upfront setup, plus regular payroll calculations, pre-scheduled tax return filings and some year-end paperwork. Here’s a general idea what you can expect to do if you choose to pay nanny taxes yourself:

1. Take Care of the Setup Work

You can’t begin calculating payroll for your nanny without knowing how much in taxes to withhold. To do this, you’ll need your nanny to fill out Form W-4 and a state withholding form (if your state collects income taxes).

Because you are, technically, the employer of your nanny, you’ll also need to apply for a Federal Employer Identification Number (FEIN) with the IRS, as well as state tax identification numbers with the agencies that handle collection of state taxes. These tax IDs identify you as a household employer and are required for sending in tax returns.

2. Accurately Calculate Payroll Each Pay Period

You’ll need to keep track of the hours your nanny works, apply their hourly rate, and add any overtime pay to get to the gross (before taxes) amount. From there, you’ll need to withhold the correct amount of Social Security & Medicare taxes, income taxes, and any other state or local taxes that may apply. After these deductions, you’ll know how much your nanny’s net, or take-home, pay will be.

Read more about How Much a Nanny Costs.

You’ll also need to calculate how much in Social Security & Medicare taxes, unemployment insurance taxes and any other miscellaneous state taxes you have accumulated as a household employer.

3. Send Tax Payments and Returns to the IRS and the State

Your state requires you to send in tax returns—generally on a quarterly basis—for unemployment insurance taxes and income taxes. (Note: Some states have a different schedule.) You’ll need to keep track of when these returns are due and send the appropriate amount of taxes to the correct agency. Check your state’s requirements for more details.

Additionally, it’s recommended to send in estimated tax payments to the IRS four times per year to account for the Social Security & Medicare taxes you’re withholding from your nanny and accumulating for yourself. Waiting until you file your personal income tax return in April can result in underpayment penalties.

4. Prepare Your Year-End Tax Documents

After the year ends, you’ll need to prepare several documents to put a wrap on your nanny tax requirements:

  • Form W-2 for your nanny, so they can file their personal income tax return.
  • W-2 Copy A and Form W-3 to be filed with the Social Security Administration.
  • A state Annual Reconciliation Form if your state requires it.
  • Schedule H for you to attach to your personal income tax return.

The IRS estimates this work will take the average family 50-55 hours per year to administer. If you’d like to have those hours back in your life and enjoy the peace of mind of having an expert handle it all for you, give HomePay a call. We’ve been helping families with these requirements for more than 25 years and can make the process a breeze.