FAQ – About taxes for household employers.
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Can I Classify My Nanny as a “Contractor” and not an “Employee”?
Unless the nanny is performing childcare out of his or her home, the answer is almost certainly “no”. The IRS is aware that many try to avoid the “nanny tax” by classifying their employees as contractors. Publication 926 from the IRS addresses this.
Which Taxes are Household Employers Required to Pay and Withhold for Employees?
You are required by law to pay:
- Employer’s share of FICA (Social Security + Medicare) a Federal tax levied on Employers and Employees
- FUTA (Unemployment Tax) a Federal tax levied on Employers
- Unemployment and Disability Insurance a State tax levied on Employers
These are in addition to the gross amount of your nanny’s salary.
You are required by law to withhold:
- Employee’s share of FICA (Social Security + Medicare) a Federal tax levied on Employers and Employees
These are taken out of the gross pay you pay your nanny.
Additionally, you may (and are strongly encouraged to) withhold:
- Unemployment and Disability Insurance in states that levy this tax on Employees
- Income tax, levied on Employees by Federal and State agencies.
These taxes are deducted from your nanny’s gross pay, meaning you don’t pay anything extra. However, if you don’t withhold them, your nanny is still responsible for paying them. Since tax withholding and reporting can be complex, it’s highly recommended to learn how to pay a nanny legally to ensure compliance with no extra effort on your part. Ultimately, the choice is yours.
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What laws apply to employment of Household Employees?
There are several. We do not provide legal or employment advice. However, we are aware of some of the laws that commonly apply to our employers and want to pass along what we know. Here are some of the biggies.
A Household Employee is not a Contractor. A Nanny is almost always considered an employee and not a contractor under IRS regulations.
Employer Taxes. You must begin withholding and paying taxes on your Nanny’s earnings if she makes more than $1,000 in any quarter, or $2,400 in the calendar year (2022).
Federal, State, and Local minimum wage laws apply to Nannies and all Household Employees.
Nannies and other Household Employees are almost always hourly and not salaried employees. Overtime provisions of 1.5 times regular salary for nannies that work more than 40 hours per week and are not live-in are required by Federal law (under the Fair Labor Standards Act https://www.dol.gov/whd/regs/compliance/hrg.htm#2) and some states laws. “Home Care Workers” or Adult Caregivers are often entitled to overtime but it gets complicated. Your best guide for this kind of employee can be found here https://www.dol.gov/whd/homecare/homecare_guide.pdf. Most states follow the federal provisions but there are exceptions.
You can look up your minimum wage here: https://www.epi.org/minimum-wage-tracker/
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What About Lodging for a Live-in Nanny? Is this Benefit Taxable?
IRS Publication 15-B states that in most cases you may exclude the value of lodging from taxation.
See Publication 15-B:
It should be noted that most states also follow the logic of the IRS on this one, but some may not. Please check with your local tax authority for any state tax issue.
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Are there tax advantages for paying my nanny/caregiver legally?
Yes!
You must legally pay your employee to receive either tax benefits through a Dependent Care Account (through your workplace) or receive a Tax Credit for Child or Dependent Care. How much you will save in taxes depends primarily on your tax bracket, childcare cost, marital status. The Child and Dependent Care Tax Credit can also be used on your tax return (but you can’t double dip FSA expenses). The Child and Dependent Care Credit provides up to $5,000 of child care and similar costs for children under 13, an incapacitated spouse or parent, or another dependent so that you can work.
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