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Don’t forget to pay the nanny tax on help around the house

It’s Your Money

Posted: July 24, 2008 1:41 a.m.
Updated: September 24, 2008 5:03 a.m.

If you hire someone to help around the house or to watch your children, you may be subject to the often overlooked “nanny tax.” Simply put, the nanny tax is a payroll tax due on certain household employees’ wages.

Household employees include baby sitters, cleaning people, drivers, housekeepers, nannies, health aids, private nurses, maids, caretakers and yard workers. The 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.

You hire Betty as a nanny to care for your child and do light household work four days a week in your home. Betty follows your instructions about household and child-care duties. You provide the equipment and supplies Betty needs to do her work. Betty is your employee.

If only the worker can control how the work is done, the worker is not your employee but self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public. If an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

For example, you made an agreement with John to care for your lawn. John runs a lawn care business and offers his services to the general public. He provides his own tools and supplies. He is not your household employee.

When you hire a household employee, you and the employee must complete the U.S. Citizenship and Immigration Services Form I-9. You must examine documents presented by the employee as evidence of his or her identity and employment eligibility. Keep the completed Form I-9 for your records. You also need to register with the California EDD and obtain an employer ID number.

The federal nanny tax has two parts. First, a Social Security and Medicare tax equal to 15.3 percent applies to the wages of each employee paid $1,500 or more. Half of this tax may be withheld from the employee’s paychecks. You, the employer, are responsible for the other half. Second, a federal unemployment tax applies if you pay $1,000 or more in any quarter to all household employees combined. This tax is 0.8 percent of the first $7,000 paid to each employee. You do not need to withhold federal and state income tax from your household employee’s wages.

After the end of the year, you give your household employee a W-2 reporting the total wages paid and taxes withheld. The nanny tax is reported on your personal income tax return on Schedule H, and there are penalties for not paying it. If overlooked, the government could discover your oversight if an employee questions his Social Security benefits statement, applies for unemployment benefits or files a work-related injury claim.

For additional information about the nanny tax, get IRS publication 926-Household Employer’s Tax Guide.

Alan J. Lyon CPA specializes in tax planning, tax preparation and consulting for individuals and businesses in Santa Clarita. “It’s Your Money” appears Thursdays and rotates between a handful of the valley’s financial professionals. Her column represents her own views, and not necessarily those of The Signal.


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