Nanny tax: What is it, and how does it apply to me?
5 min read
December 20, 2023 • Block Advisors
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. 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 more.
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, Medicare, and unemployment taxes.
As an employee, you are responsible for some taxes. These include federal and state income taxes and FICA taxes (Social Security and Medicare). You will file taxes like any other employed person if you qualify as a household employee. Your employers should provide you with a Form W-2 to complete so they can use it to file Form 1040.
Nanny tax tip: Be proactive! Inform your employing family that you would like to withhold federal and state income tax on your earnings. This will help your employer avoid tax penalties and make tax time smoother for you.
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:
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 employee. Learn more about self-employment taxes.
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 partially determines your employee status based on your employer’s level of control or direction.
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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 taxes. 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.
- 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.
- 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.)
Nanny tax exceptions
If you are considered an employee and not an independent contractor, you won’t have to worry about nanny taxes if you meet a few conditions. If, as the nanny, you are:
- Your employer’s spouse
- Your employer’s child under the age of 21
- A minor under 18, unless your main 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 you determine your net pay –your 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. Feeling overwhelmed still? Block Advisors can help you sort through the laws and regulations associated with nanny taxes. Speak with a certified small business tax pro today.