In today’s fast-paced society, more and more busy professionals are relying on others to help them with their child care, house cleaning and lawn maintenance. Many of these service professionals are paid in cash throughout the year, but what happens come tax time? If you hire someone to come to your home and help you with a task, from child care to lawn care, and you pay cash, when are you required to pay taxes and how much should you pay?
Since 2009, the IRS states that if you pay a nanny $1,700 or more during one year, you are required to pay a “nanny tax.” It may be tempting to think you can avoid paying this tax if you make all of your payments in cash. However, any number of situations, including if your nanny applies for Social Security benefits or unemployment benefits, can tip the IRS to the fact that you have been avoiding paying taxes to your employees. You will then be charged for the back taxes and applicable penalties and fees.
The only exception to paying the nanny tax is if your spouse, child under 21 or your own parent (assuming certain criteria) watches your children. Also, if you hire a nanny through an agency and the agency pays the nanny, you general do not have to.
What Is the Nanny Tax?
The nanny tax includes FICA (Social Security and Medicare taxes) and Federal Unemployment Tax. You may owe other taxes depending on the state in which you reside. (You can consult IRS Publication 926 for further details.) For 2011, the employer must pay 6.2% to Social Security and 1.45% to Medicare. The employee must pick up the other 4.2% of Social Security and 1.45% to Medicare for the FICA portion. Typically you will owe just 0.8% for the Federal Unemployment Tax.
How to File the Nanny Tax
You can either pay the nanny tax on a quarterly basis, which is usually the best option if you are employing a full-time nanny and will quickly meet the $1,700 earning requirement, or you can file it annually when you file your own tax return. However, the latter option is better if you don’t owe much nanny tax, i.e. you only paid a nanny or other household worker a few thousand dollars over the course of a year.
Be advised that if the nanny earned less than $1,700, you are not required to pay her taxes, but you are required to file a 1099 if she earned between $600 and $1699.
There is no doubt that nannies and house cleaners can help you maintain your busy lifestyle. However, before employing one on a regular basis, make sure that you are familiar with the nanny tax laws and what you need to do to file so that you don’t face stiff tax penalties for missed payments. Talk to a professional to get all of the details before hiring the nanny so you can be up front with her about any deductions you may have to take out of her regular paycheck.
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