Now that you know that you, in fact, have a household employee, what are the taxes involved? Also, what are the rules for determining, paying, and reporting the variety of taxes associated with having a household employee? Not only is it illegal to skip the nanny tax, it is also unfair to the person working for you. If you are not paying the nanny tax, then you are potentially depriving him or her from future Social Security and Medicare benefits.
The Nanny Tax
Before you hire anyone, make sure first that that person can legally work in the United States. If you pay cash wages of $2,000 or more for 2016 to any one household employee, then you should pay Social Security and Medicare taxes. Talk to your household employee and agree with him or her about whether you, the employer, will withhold federal income tax too. If you agree, then you will need a completed Form W-4, Employee’s Withholding Allowance Certificate from your employee. You should then check with your state about whether you will owe state employment taxes.
Social Security and Medicare Taxes
Decide also whether you are going to pay your employee’s share of Social Security and Medicare taxes, or deduct it from her pay. Explain this decision carefully to him or her. Medicare and Social Security taxes amount to 15.3 % of your employee’s pay. This 15.3% comes from the 7.65% that you deduct from each paycheck to your employee and the other 7.65% comes from you, the employer. You should then send both halves of the tax to the federal government. Remember that you should not withhold or pay social security and Medicare taxes from wages you pay to:
- Your spouse
- Your child who is under age 21,
- Your parent, unless an exception is met, or
- An employee who is under age 18 at any time during the year, unless performing household work is the employee’s principal occupation. If the employee is a student, providing household work is not considered to be his or her principal occupation.
Filling Out Form W-2
Keep records of all payments to your household employees, whether cash or check. At the end of the calendar year, add up all the money you’ve paid him or her. Before February, contact the IRS to be assigned an employer identification number but you can also choose to apply online, apply by fax, or apply via mail. By the beginning of February, you must fill out Form W-2 and give copies to your employee.
- On Form W-2, put the employee’s Social Security Number in box a.
- Put your employer identification number in box b.
- Put your name and address in box c.
- Put your employee’s name and address in box e.
- Write the total wages you paid in boxes 3 and 5.
- Multiply the total wages by 6.2 percent and write the answer in box 4. This is the employee’s share of Social Security tax. If you also withheld federal income tax, it should go in box 2.
- Multiply the total wages (box 3) by 1.45 percent and write the answer in box 6. This is the employee’s share of Medicare taxes. Add together the figures in boxes 2, 3, 4 and 6 and put the total in box 1.Copy the information onto the duplicate copies of Form W-2. Give the Form W-2 to your employee but keep Copy A for yourself.
Filling Out Form W-3
- On Form W-3, copy the numbered boxes from Form W-2 into the corresponding boxes.
- Fill in your name, address, phone number and employer identification number.
- Check the box that says “Hshld.emp.” to indicate that you’re a household employer.
- Sign and date the form.
Before March, send Form W-3 and Copy A of Form W-2 to the Social Security Administration. Then, by April 15, file Schedule H with your federal income tax return (Form 1040). The figures on Schedule H for Medicare and Social Security taxes should be double the figures on the W2, because you’re paying the share of your household employee plus the employer’s share.
There are other taxes that you should also be familiar with, including the Federal Unemployment Tax and the Additional Medicare Tax. For more information about these topics, visit the IRS website.