The "nanny tax" rules apply to you only if (1) you pay someone for household work and (2) that worker is your employee.
- Household work is work done in or around your home by baby sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers.
- A household worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time, or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business. If an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.
Example: You pay Betty to baby sit your child and do light housework four days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.
Example: You pay John to care for your lawn. John also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees.
Both you and your household employee may owe Social Security and Medicare taxes. The taxes for each of you are 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee's Social Security and Medicare wages.
You are responsible for payment of your employee's share of the taxes as well as your own. You can either withhold your employee's share from the employee's wages or pay it from your own funds.
Social Security And Medicare Wages
You figure Social Security and Medicare taxes on the Social Security and Medicare wages you pay. If you pay your household employee cash wages of $1,700 or more in 2010, (or 2009) all cash wages you pay to that employee in 2010 (regardless of when the wages were earned) are Social Security and Medicare wages. If you pay the employee less than $1,700 in cash wages in 2010 (or 2009), none of the wages you pay the employee are Social Security and Medicare wages, and neither you nor your employee will owe Social Security or Medicare tax.
Wages Not Counted
Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:
- Your spouse.
- Your child who is under age 21.
- Your parent.
Note: However, you should count wages to your parent if both of the following apply: (a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter, and (b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.
- An employee who is under age 18 at any time during the year.
Note: However, you should count these wages to an employee under 18 if providing household services is the employee's principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.
Also, if your employee's Social Security and Medicare wages reach $106,800 in 2010 (Same in 2009), do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. (But continue to count the employee's cash wages as Medicare wages to figure Medicare tax.)
You figure federal income tax withholding on both cash and non-cash wages (based on their value). However, do not count as wages any of the following items:
- Meals provided at your home for your convenience.
- Lodging provided at your home for your convenience and as a condition of employment.
- Up to $230 a month in 2010 for bus or train tokens (passes) that you give your employee or, in some cases, for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
- Up to $230 a month in 2010 to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.
Withholding The Employee's Share
You should withhold the employee's share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $1,700 or more in 2010. However, if you prefer to pay the employee's share yourself, see "Not Withholding the Employee's Share" in the next section.
You may withhold the employee's share of the taxes even if you are not sure your employee's Social Security and Medicare wages will be $1,700 or more in 2010. If you withhold the taxes but then actually pay the employee less than $1,700 in Social Security and Medicare wages for the year, you should repay the employee.
You pay withheld taxes as part of your regular income tax obligation. You don't deposit them periodically-subject to an exception for business owners. See "Payment Options for Business Employers" below.
Withhold 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) from each payment of Social Security and Medicare wages. Instead of paying this amount to your employee, you will pay it to the IRS with a matching amount for your share of the taxes.
If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.
Example: You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,600 or more for the year. You should withhold $7.65 from each $100 wage payment and pay your employee the remaining $92.35. The $7.65 is the sum of $6.20 ($100 x 6.2%) for your employee's share of Social Security tax and $1.45 ($100 x 1.45%) for your employee's share of Medicare tax. You will match the $7.65 you withhold with $7.65 from your own funds when you pay the taxes.
Not Withholding The Employee's Share
If you prefer to pay your employee's Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee's wages. The Social Security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.
Example: You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,600 or more for the year. You decide to pay your employee's share of Social Security and Medicare taxes from your own funds. You pay your employee $100 every Friday without withholding any Social Security or Medicare taxes. For each wage payment you will pay $15.30 when you pay the taxes. This is $7.65 ($6.20 for Social Security tax plus $1.45 for Medicare tax) to cover your employee's share plus a matching $7.65 for your share. For income tax purposes, your employee's wages each payday are $107.65 ($100 plus the $7.65 that you will pay to cover your employee's share of Social Security and Medicare taxes).