Hiring someone to help around the house or even help care for your kids is a great way to free-up time and reduce stress levels. However, many people hiring in-home workers are not aware of that there are tax implications when doing so. This is commonly referred to as the “Nanny Tax.”
When you hire someone as a household or domestic worker, you will generally be treated as their employer for tax purposes. Though the nickname for the tax only mentions nannies, it also applies to housekeepers, maids, babysitters, gardeners or other household employees who aren’t independent contractors.
As a household employer, you are required to withhold FICA taxes on your worker’s wages and issue him or her a Form W-2 if you pay them $2,000 or more in wages in 2016. You are also required to withhold unemployment taxes if you pay the worker $1,000 or more in any calendar quarter during the year. It is important to note that you are not required to withhold federal income tax (FITW) unless you and the worker enter into an agreement that you will do so.
In these situations, the household employer and a household employee have an obligation to pay FICA taxes(i.e. Social Security and Medicare). As an employer, you are responsible for withholding your household employee’s share of FICA. Additionally,, you must pay a matching amount for your share of the taxes. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2% for the employer and 6.2% for the nanny, for a total rate of 12.4%. The Medicare tax is 1.45% each for both the employer and the household employee, for a total rate of 2.9%.
One major exception to the tax applies in the case of nannies and babysitters under the age of 18. If your nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if your nanny is really a student who is a part-time baby-sitter, there’s no FICA tax liability for her services. On the other hand, if your nanny is under age 18 and the nanny job is his or her principal occupation, you must withhold and pay FICA taxes.
Reporting Household Employment Taxes
All of this will end up on your personal tax return. Household employers are not required to file the normal employment tax returns a business would use to report compensation paid to an employee. Instead, the taxes are reported on their individual Form 1040 via Schedule H (Household Employment Taxes) and issue the worker a standard Form W-2.
The Form W-2 typically must be provided to the household employee by the first of February, even if you have not filed your individual tax return at that time.
Tax Benefits for Hiring Household Employees
Unfortunately for most, the payments made to a household employee and the taxes paid and withheld on those payments typically do not qualify for a deduction or a credit on the employer’s personal taxes. The payment of household employees is usually considered a nondeductible personal expense unless the household employee is providing deductible home health care. An individual is not allowed a deduction for personal, living, or family expenses.
However, if your worker is a nanny or babysitter, the expenses may qualify for the dependent care tax credit if you, the household employer, otherwise meet the requirements for the credit. Employment-related expenses qualifying for the credit are expenses for household services or for the care of qualifying individuals age 12 and under that are incurred to enable you to be gainfully employed. Costs of a housekeeper, maid, babysitter, or cook ordinarily qualify, at least for the portion spent for care.
In rare cases, if the household employee is providing deductible in-home health care you, the household employer, may be able to deduct the wages as medical expenses on Schedule A of your Form 1040, above the 10% of AGI limitation (7.5% for individuals over 65) that applies to this type of itemized deduction. Many elderly or handicapped individuals employ private-duty nurses or attendants as an alternative to moving to a nursing home or other long-term care facility. The cost of these in-home services is deductible as a medical expense if they qualify as either (1) medical care or (2) long-term care services. To qualify as long-term care services, the taxpayer must be chronically ill and the services must be pursuant to a plan prescribed by a licensed health care practitioner.
If you are considering hiring, or have hired, a nanny or other type of domestic worker, our Tax Professionals can help you understand how to handle their employment for your tax purposes. You can make an appointment at an office near you to help you prepare and plan.