Arranging Household Help - "Nanny Tax" Law
It's tough enough to find the right person to care for your child in your home, without having to worry about the tax complications of becoming a household employer. And although the rules have been liberalized in some ways, other requirements are just as stringent as they've always been. Here's a snapshot of what you must do to steer clear of trouble with the IRS when you hire someone to take care of your children in your home.
Social Security and Medicare tax (FICA). As a general rule, you don't have to withhold or pay social security and Medicare taxes or file payroll tax returns for any household employee unless you pay him or her $1,000 or more a year, indexed for inflation. The threshold was $1,400 for 2005 and is $1,500 for 2006. However, once you cross the threshold as indexed, you're burdened with tax responsibilities starting with the first dollar of earnings. For example, if you pay someone $10,000 a year to take care of your child while you work, you withhold $765 from the worker's pay (7.65%) and pay the IRS a matching amount, yourself. There is one limited exception for wages paid to domestic employees who are under 18. Social security and Medicare tax doesn't apply at all to these employees if domestic work isn't their principal occupation. This exception may help with steady evening and weekend baby-sitters, but otherwise it's not important to most parents who need help with children during the day.
Unemployment tax (FUTA). You must pay the FUTA tax for any household employee whom you pay $1,000 or more in a calendar quarter. The effective FUTA tax rate is .8%.
Payroll tax paperwork. The FICA and FUTA you owe for any household employee is computed on Schedule H of Form 1040 and paid along with your regular income tax bill. Although you're not required to make estimated tax payments for FICA and FUTA, it might be a good idea to make quarterly payments to avoid winding up with an unexpectedly large bill at tax return time.
Federal income tax withholding. Thankfully, you aren't required to withhold federal income tax from the wages of household employees. But you are required to file a Form W-2 for every domestic employee whose wages are subject to the social security tax. And you will need to get an Employer Identification Number for yourself, which is not the same as your social security number.
If you pay the nanny's share of social security taxes in addition to your share rather than have the nanny incur that expense, you or the nanny won't need to pay additional social security taxes on that amount. The nanny, however, will be considered to have additional income for income tax purposes.
There may be other tax complications as well. For example, many employers may have to file and pay state unemployment insurance tax for each quarter in which the state wage threshold is reached. And the rules may be somewhat different if you have other employees.
As you can see, the tax rules for child-care help are still complicated. If you have any questions as to how these rules apply to
your particular situation, please do not hesitate to call
the Certified Public Accountants at Wood, Johnson, Heath,
P.C. at 512-343-8075.