Understanding the nanny tax: What it is and how it applies to you

Working arrangements are often more casual or flexible when working as a nanny or caregiver in somebody else’s home. You may even get paid in cash wages. However, this can confuse both the employer and the employee (you!). If you’re a nanny, keep reading as we outline how to determine if you’re considered a household employee. We’ll also cover nanny tax rules, responsibilities, and paying nanny taxes.

What is the nanny tax?

The phrase “nanny tax” refers to the federal and state taxes families or individuals must pay when they hire a household employee, such as a nanny or caregiver, who makes a certain amount of money. It also encompasses your tax responsibilities as the nanny. The nanny tax covers federal Social Security and Medicare taxes (FICA tax) and federal unemployment tax (FUTA tax).

As an employee, you are responsible for some taxes. These include federal and state income taxes and FICA taxes. You will file taxes like any other employed person if you qualify as a household employee. Your household employers should provide you with a Form W-2 so you can use it to file Form 1040.

Nanny tax tip: Be proactive! Inform your employing family that you would like them to withhold your portion of federal and state income tax from your paychecks. This will help you avoid tax penalties and make tax time smoother.

What is a household employee?

As a nanny, calling yourself a household worker or employee may feel overly formal. But did you know that not all nannies are considered household employees? Here’s a summary of the technical IRS definition:

Self-employed caregivers

You may be a self-employed caregiver if you:

• offer services to the public
• have multiple families in your care
• provide in-home care versus working in a home
• bring your own supplies and tools when you go to someone’s home
• are responsible for selecting when you work

If the above statements resonate with you, you may be considered a self-employed independent contractor rather than a household worker. Learn more about self-employment taxes.

Household workers

In the eyes of the Internal Revenue Service (IRS), you may be a household employee rather than an independent contractor if your employing family:

• dictates your working hours and schedule
• directs what and how you perform your role

For example, if you must adhere to a specific schedule each week and have set rules of how the housework should be performed, you may be considered a household worker. The IRS mainly determines your employee status based on your employer’s level of control or direction over your work and how it should be performed.

Tax responsibilities for nannies

As a nanny, you must take care of a few tax responsibilities as part of your household employment. However, your tasks may be different depending on your official tax status.

As noted above, a nanny or caregiver may be:

• An independent contractor (these nannies are considered self-employed vs. an employee)
• Or a household employee

What independent contractors need to do

You’re an independent contractor if you don’t meet the household employee definition. In that case, you’ll receive 1099s and possibly 1099-Ks (if paid digitally) throughout the year. As an independent contractor, you’re responsible for paying self-employment tax. To keep current on required taxes, many contractors must pay estimated quarterly taxes throughout the year.

What household employees need to do

Nannies in the household employee category must complete different tax forms than independent contractors. Much of this paperwork needs to be completed before starting the job.

1. Form I-9: Provide a completed IRS Form I-9 to your household employer to ensure you’re qualified to work in the U.S.
2. Form W-4: Provide a completed IRS Form W-4 and state income tax withholding forms. It is crucial to accurately provide your name, address, and Social Security or ITIN to your household employer. (Resource: Here’s how to fill out a W-4 form.)

Note:The W-4 is optional, but it is a good idea to complete it to ensure accurate withholding amounts.

What nanny employers need to do

Household employers have their own set of requirements for household employment taxes. Your employer will be responsible for tax withholding, their half of FICA tax, and unemployment tax. Your employer must also report your wages to the Social Security Administration.

There are benefits of nanny taxes for employers as well. Household employers could be eligible for tax breaks like the Child and Dependent Care Credit. Employers could also use their Flexible Spending Account (FSA) to cover expenses associated with the nanny’s care. (Here’s more about the nanny tax for employers and running nanny payroll).

Nanny tax exemptions

If you are considered an employee, not an independent contractor, and meet one of the conditions below, you won’t have to worry about nanny taxes.

• You are your employer’s spouse.
• You are your employer’s child under the age of 21.
• You are your employer’s parent (with some exceptions).
• You are a minor under 18, unless your primary occupation is the services you provide and you’re not a student.

Which tax credits do household employees qualify for?

If the IRS considers you a household employee, you may qualify for the Earned Income Tax Credit (EITC). The EITC is a tax break for low- and moderate-income workers that can reduce your tax bill. The credit has specific income qualifications, so ensure you’re eligible first.

Nanny tax: Example calculation

A nanny tax calculator can help determine your net (take-home) pay. Here’s an example of what the nanny tax calculation may look like as a household employee.

Let’s say that you’re a nanny working in Colorado. You are being paid $20/hour for 30 work hours each week looking after two children. Your pre-tax gross pay is $600 a week. We’ll assume your withholding status is “single,” you don’t have a second job, and there’s no overtime involved.

Example tax breakdown for each weekly pay period:

• Gross pay: $600
• Federal income tax: $35.81
• Social Security: $37.20
• Medicare: $8.70
• State income tax: $23.00
• Total tax responsibility: $104.71
• Net pay = Gross pay – Taxes: $600-$104.71 = $495.29

Benefits of nanny taxes as the employee

There are benefits for both parties when it comes to reporting nanny taxes. As an employee, you will benefit from having employment on record. If you apply for a loan, want to buy a home, lease a car, rent an apartment, or get a new credit card, having income records from a job is crucial. In addition, as an employee, you can access things like unemployment benefits, Social Security income, Medicare, and potentially even affordable and subsidized health insurance costs through the Affordable Care Act.

Where to go for more help with nanny taxes

Understanding your tax responsibilities as a nanny can be confusing. Still feeling overwhelmed? Block Advisors can help you sort through the laws and regulations associated with nanny taxes. Speak with a certified small business tax pro today.

This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice. 

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