Nanny Tax 101

parent calculating nanny tax

It's hard to know all the ins and outs of hiring a caregiver, but families often overlook one important thing: taxes.

What Are Nanny Taxes?

The "nanny tax" is comprised of a combination of taxes you withhold from your employee and the taxes you pay as the employer. Typically, you'll withhold Social Security and Medicare (collectively known as FICA) and federal and state income taxes from your employee each pay period. You'll also pay a matching portion of FICA, as well as federal and state unemployement insurance taxes.

Note: Not all states operate this way. Some don't have income taxes, while others require additional taxes to be either withheld from your employee, paid by the employer, or both. To see the specific requirements for your state, visit the nanny tax page from your state.

Do You Need to Pay Nanny Taxes?

If you pay your nanny -- or any household employee -- $2,000 or more in a calendar year, the IRS says you have tax and payroll responsibilities as a household employer.

Unless you're a tax expert, you probably have a few questions about how to do things correctly. To help you out, here are the answers to some common nanny tax questions and concerns:

Is Your Nanny an Employee?

In short, yes. According to the IRS, a person is an employee if you're telling them what they will do and how they will do it, as opposed to an independent contractor that you tell only what results you're looking for. Families that misclassify their household employee as an independent contractor (by providing a Form 1099 for filing taxes) can be charged with tax evasion.

Learn more about why your nanny is NOT an independent contractor
 

What Will Families Need in Order to Pay Nanny Taxes?

Here are four things to collect:

  • ID numbers: You need both the federal and state tax identification number in order to report your nanny taxes. You can get your federal employer identification number (FEIN) from the IRS and use this number to obtain your state identification number from the appropriate tax agency in your state.
  • Payroll info: You need to accurately calculate your employee's gross pay, calculate the taxes withheld, and track the corresponding employer taxes each pay period. (Use our nanny tax pay calculator to help.)
  • Forms:
    • You must provide your nanny with a Form W-2 by the end of January each year.
    • You need to file any required year-end forms with the state, as well as Form W-3 and Form W-2 Copy A with the Social Security Administration.
    • You need to prepare a Schedule H and file it with your federal income tax return.
  • Quarterly filings
    • You should file state tax returns, typically on a quarterly basis.
    • You should send 1040 estimated payments to the IRS four times per year.

The good news? Once you've joined Care.com HomePay, we handle all of these forms and quarterly returns for you. Check out how our service works.

What Will Caregivers Need to Provide to Their Family?

Here are three things that nannies need to provide:

  • A Social Security number or an ITIN;
  • A completed Form I-9 with proper identification; and,
  • A completed federal W-4 form and corresponding state income tax withholding form (if you live in a state with income taxes).

If you need information on federal and state withholding, check out our article on W-4 forms for nannies and caregivers.

What Are the Benefits of Paying Your Nanny Legally?

Both families and their nannies actually benefit from proper tax reporting. Employers may be eligible for tax breaks to offset the cost of taxes and have less to worry about if they're audited by the IRS or the state. Caregivers also gain this peace of mind; plus, it's easier to qualify for short- and long-term benefits like:

  • Social Security income and Medicare coverage upon retirement
  • Unemployment benefits if they lose their job due to no fault of their own
  • A verifiable employment history necessary for obtaining auto and home mortgage loans
  • Reduced health care costs via subsidies provided through the Affordable Care Act

Read more about the Top 3 Benefits of Reporting Nanny Taxes

What Can Happen if You Pay Your Nanny "Under the Table"?

Here's a simple example of what can happen: your nanny works for you for several years without having taxes withheld or you paying taxes on her wages. When the kids are in school full-time, you decide to part ways, since her services are no longer needed. She files for unemployment benefits and is required to list her past employers, which includes your family. The unemployment office reviews the case and finds that your family didn't file any tax returns or pay into the state unemployment insurance fund. Your ex-nanny is refused benefits and you're now facing an audit from the state.

Whats the punishment? Here's the list of possibilities: tax evasion charges; back taxes with penalties and interest; liability for the employee and employer portions of FICA; and, in some cases, loss of professional license.

As of April 2006, the IRS has started to crack down on employers who pay under the table or misclassify their employees as independent contractors. Now more than ever, it's important to be cautious. Learn about the Top 11 Professions Most at Risk if Not Paying Nanny Taxes.

For help on how much you should be paying in nanny taxes and saving on tax breaks, check out our Nanny Tax Calculator.

How Much Work Will This Involve?

The IRS estimates the average family can expect to spend 50-55 hours per year correctly managing the nanny tax process. This includes all the tax requirements listed above, as well as managing your employee's payroll and responding to any notices sent by the IRS and tax agencies in your state.

Our HomePay experts can take care of all the work for you. From handling all the paperwork to actually filing your returns, we take care of everything. If this sounds like the better option for your family, contact our office or feel free to get started online. Call for a free consultation at (888) 273-3356.



* The tax information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional tax adviser who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.

493 Comments

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Photo of Tom B.

Tom B.

Hey Paige, yes you should a W-4 filled out even if your employer isn't withholding federal income taxes from your pay. If they're paying the taxes for you, they need to know how to calculate income taxes so their employment tax returns are accurate. If they're not withholding from you because you're exempt, that also needs to be on file in case there's ever a question concerning your income tax return.
May 05, 2016 at 5:26 PM
Photo of Tom B.

Tom B.

Hi Diana! The scenario you presented would make a family responsible for following all the federal and state household employment payroll and tax processes in California. That means the family needs to withhold taxes from your pay and pay taxes of their own. They will need your SSN to put on their tax returns as well as a specific tax break many families use at the end of the year. If you'd like to point your family over to the specifics in California, that article is here (http://www.myhomepay.com/Answers/State-Nanny-Tax/CA/Overview). Please also let them know that HomePay can help with these processes.
May 05, 2016 at 5:21 PM
Photo of Tom B.

Tom B.

Hey Jaqueline, in a nannyshare, you're probably okay with the rate you're being paid, but you really need to have both families treating you as an employee instead of an independent contractor. First off, the law is very explicit that you should receive a W-2 rather than a 1099, but secondly, you're paying twice as much in FICA taxes that you should be and are not receiving the full benefits that employees should receive. Check this article out for tips on how to approach this subject with the families you work with. (https://www.care.com/homepay/how-to-get-your-employer-to-pay-you-over-the-table-1312161356)
May 05, 2016 at 5:12 PM
Photo of Tom B.

Tom B.

Hi Tracey! It's always better to plan ahead rather than be reactive. My suggestion would be to set up federal and state EINs and withhold taxes from Day 1 in case you end up crossing that $2,000 threshold. If it turns out that your caregiver never makes $2,000 throughout the year, you can simply reimburse them the money you withheld.
May 05, 2016 at 4:39 PM
Photo of Tom B.

Tom B.

Hey Emily, the $2,000 threshold is per employee rather than the total wages paid to all employees. Your date night sitter should be fine in terms of withholding and paying FICA taxes, but you'll need to include her wages when you file your state unemployment insurance tax returns. The state requires you declare the total wages paid to all employees if they amount to $1,000 or more in a calendar quarter.
May 05, 2016 at 4:34 PM
Photo of Emily K.

Emily K.

If I am already paying a nanny on the books, and I hire another caregiver for occasional date nights, do I also have to pay her on the books? Is the $2000 threshold for all my caregivers or just one?
May 02, 2016 at 2:26 PM
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Tracey M.

Hi -- We are about to hire a senior care-giver. Initially it is likely we will not meet the $2,000 year requirement in order to make tax withholdings because she will be helping us on a sporadic/respite schedule. However, if during the year that changes and we end up using her more, and we do go over the threshhold, what's the best way to handle to taxes. Should we get set up with and EIN now just "in case" we end up paying her more, or wait & see what happens?
April 18, 2016 at 8:50 AM
Photo of Cynthia S.

Cynthia S.

This is the first year to file as a self employed. I am having to pay in this year because nobody wants to pay nanny taxes. So far it was not to much. My question is what about claiming mileage on your car for income taxes purpose.How do you calculate it?
April 11, 2016 at 11:23 PM
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Jaqueline M.

Hi Tom, I'm doing a nanny share and I'm being paid $19 for both children and $12 for the extra 10 hours I'm not doing the nanny share. They are not willing to pay my taxes but they pay with direct deposit. I filed my taxes as an independent constructor and paid almost 5,000. I know I'm being paid very low for each child ($9.50) when it should be $10 per child per hour. I'm im Massachusetts, boston. What should I do?
April 06, 2016 at 4:35 PM
Photo of Diana C.

Diana C.

Hello Tom. I am curious. Lets say family is paying $13 an hour for 2.5 hr a day X5 days a week. Roughly $163 a week, $652 a month for part time work. They pay cash. Now, they want to collect child care at the end of year. Am I responsible for taxes? In Ca, minimum tax filing sum is around $850 I believe. What are my options? I fall into $850 a month guideline. Will I be penalized later by IRS for not filing taxes? Does family still need my SSN to file taxes because they are paying me $652 a month? Will I be affected in any way? Thank you,
April 05, 2016 at 4:08 PM
Photo of Paige L.

Paige L.

Do I still need to fill out a W-4 if my employer is not withholding federal income tax?
March 31, 2016 at 7:31 PM
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adonay

i like dogs
March 25, 2016 at 3:45 PM
Photo of Ariel R.

Ariel R.

why does this site have more about taxes than they do about actual baby sitting look this is a contracted job 1099 that's not up to us also why do you charge 300 for a back round check live scan does a fingerprint and 25 years of everything offered on this site for 50.00 cool concept this website can be very annoying
March 18, 2016 at 7:12 PM
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Becky

If I have a family member (she's my cousin) providing care in exchange for living with us, do I still need to pay nanny taxes? Would the answer change if I paid her a nominal amount (maybe $500/month) in addition to the living arrangement? Or do I need to pay her accordingly (at least minimum wage + overtime) and then charge her rent?
March 18, 2016 at 2:17 PM
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RK

Hi, We have a nanny that takes care of our child 2-3 times per week for the past 9 months or so. Unfortunately, we were not familiar with the setup or system of filing nanny taxes and the documents that were required. Though our nanny has not filed her taxes yet, I am pretty sure that I have passed the deadline for providing tax documents for the 2015 year. I am not sure what I should do. A tax professional that I spoke with recommended that we can still give her a 1099-misc but based on my research I am not sure that that would be exactly legal. We have no intention of avoiding taxes, in fact, we want to do it the right way. Being ignorant of what all is involved, we mistakenly forgot to do it in a timely fashion. What can you recommend? Should we create an EIN for ourselves and give a 1099-misc to her? Technically she is not an independent contractor so I am not sure that would work. She wants to know what she should do on her end as well prior to filing her taxes. Thanks so much for your time.
March 16, 2016 at 10:12 PM
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Aly

Hi, My babysitter is refusing to give me her SSN so I can claim my sons care on my taxes. I had two sitters, and one has given me no trouble, but the other is being very uncooperative. What should I do about this?
March 12, 2016 at 5:25 PM
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Ash

I have a few questions. I will be nanny this summer and will be making over 3500. How do I do taxes on it and Are there any websites to help me with this? Will it cost any money to the family or me to have them claim me as an employee?
March 12, 2016 at 5:02 PM
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Bruss

If I have been dropping my daughter to a friends house to be watched and sometimes depending on her schedule she comes over to our house. What does this relationship call for:-1099 or W2?
March 09, 2016 at 10:35 AM
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Cheryl T.

The family I work for taxes are being payed to irs and have been since the first time I begin to work for each family
March 05, 2016 at 8:15 PM
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Preeti V.

We interviewed a nanny and the applicant told us that she was on a tourist visa. What are the tax implications for employing someone who is not a citizen of the US?
March 04, 2016 at 2:04 PM

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