When families hire a nanny, housekeeper or other caregiver, it’s common to be unfamiliar with IRS and state tax laws around paying household employees. Next thing you know, January and tax preparation time arrives, and you realize you owe back taxes. Or, maybe the state contacts you when a former employee whom you paid under the table files for unemployment.
No matter how or when you learn about the tax and legal requirements as a household employer, it’s never too late to catch up on your household employment taxes. And it’s important you do, as many caregivers also are unaware of tax laws, and the employer bears full responsibility for tax obligations.
So how exactly do you fix a previous year’s payroll and figure out how much retroactive or back taxes you owe for wages you paid a household employee under the table?
Read more: 4 reasons why nannies and senior caregivers need to be paid legally
How do I know if I owe household employment taxes?
For the 2023 tax year, household employment taxes, or nanny taxes as they’re commonly called, apply when a family pays any household employee $2,600 or more in a calendar year (or $1,000 or more in a calendar quarter for unemployment insurance taxes).
Read more: Is my caregiver a household employee or an independent contractor?
Learn: Why a nanny is almost never considered an independent contractor
How can I catch up on nanny or household employee taxes?
If you have a household employee, you may need to pay back taxes (Social Security, Medicare and unemployment insurance taxes), along with penalties and interest.
How much are household employee taxes going to cost me?
As a household employer, you are responsible for paying taxes all the way back to your nanny or caregiver’s first day of employment. Depending on the state you live in, employer payroll taxes typically cost about 10% of paid wages; however, if you hired a nanny or caregiver so you can work, tax breaks can help offset this cost.
To figure out what the taxes should be, enter the wages you paid your caregiver (the net pay) into our paycheck calculator.
If you find yourself catching up on taxes for wages paid in the past, your employer payroll taxes will be higher — usually ~18% — as household employers most commonly opt to pay a portion of employee taxes and have employees pay the difference when they file taxes although some families opt to cover the full cost of the back taxes. There are other ways to address this situation, and there may also be penalties and interest.
Please note: If you are retroactively addressing taxes for previous years, both you and your caregiver must amend your personal income tax returns to incorporate the adjustments.
Read more: How to start paying your caregiver on the books
What can happen if I don’t catch up and pay back taxes?
Whether you choose to pay your caregiver off the books or misclassify them as an independent contractor, you could be charged with tax evasion. High-level professionals such as doctors, government workers or attorneys also risk jeopardizing their professional licenses or careers.
“It doesn’t take much to make a family wish they’d paid legally,” says Tom Breedlove, Sr. Director of Care.com HomePay. “One unemployment claim or a wage dispute from a disgruntled employee or perhaps a workers’ comp claim, and the family is besieged with tax and legal issues.”
At the very least, if your tax returns come under IRS scrutiny, you’ll have to file late tax returns, amend your personal income tax return and pay the back taxes you owe, along with any penalties and interest.
Read more: 4 common ways families get caught paying a caregiver under the table
How do I pay back taxes?
You may certainly pay taxes yourself, as well as file necessary state and federal forms and even appeal penalties on your own. But you may also choose to hire a service, like Care HomePay, who is familiar with the entire process and can take care of all the work for you.
“The IRS estimates the average family can expect to spend 55 hours per year handling federal and state household employer obligations correctly,” says Breedlove. “Every family can choose for themselves if it’s something they can manage or if they’d rather have experts step in and take full accountability.”
If I get caught up on my tax filings, are there any tax breaks I can take advantage of?
Yes, families who pay on the books are able to get tax relief in the form of dependent care tax breaks — either a Dependent Care FSA through their employer or the Child and Dependent Care Tax Credit (Form 2441). “These tax breaks can offset most — if not all — of the employer tax costs,” says Breedlove. “But they are only available if you’re able to show that the wages were reported to the IRS.”