*Editor’s Note: This blog has been updated as of June 2023 for accuracy and comprehensiveness.

Do you employ household help? Many people who hire domestic workers often overlook the tax and legal liability considerations, especially the “nanny tax” as it is often called. Here’s what you should know.

What is the nanny tax?

If you pay any household employee $2,600 or more during 2023, you owe what’s known as the “nanny tax”. For wages paid in 2022 the threshold is $2,400. Once that limit has been met, you must remit employer and employee shares of social security and Medicare taxes.

Who counts as a household employee?

Despite the name, the “nanny tax” applies to more than just nannies. Some examples of other household employees:

• Babysitters,

• Caretakers,

• House keepers,

• Cooks,

• Drivers,

• Health aides.

Important payroll considerations for household employees

You will need to collect the following things to pay nanny taxes:

• Payroll information – It is important to calculate your employee’s gross pay, taxes withheld and the corresponding employer taxes each pay period.

• ID numbers – You will have to apply with the IRS for federal employer identification number (FEIN) so that you will be able to report payroll taxes. With your FEIN, you can then go to the tax agency in your state to acquire your state identification number.

• Forms – By the end of January each year, you must give your household employee a Form W-2. Form W-3 as well as Form W-2 Copy A must be sent to the Social Security Administration. There may also be required year end forms depending on what state you live in.

• Quarterly Filings – On a quarterly basis, you should file state tax returns and send 1040 estimated payments to the IRS.

Important considerations for workers

Make sure your household employees know that they have responsibilities regarding taxes as well. There are three important forms your employee should complete:

1. Form I-9- This form verifies that the household worker is eligible to work in the U.S.
2. Form W-4- This is completed by the employee and determines the amount of his/her tax withholdings.
3. Employment agreement- It is helpful to draw up a work agreement between you and your employee – this way you have everything documented- the work schedule, compensation agreement, tax withholding/reporting, etc.

It is not just payroll

You will need workers’ compensation coverage. If they drive your car, you will need to add them to the auto insurance policy. If they work for you in more than one State, you may need to have workers compensation coverage from multiple States.

Beware of overtime rules, which may require employees to be paid at time and a half if they exceed more than 40 hours for the week or if they work on Sundays or holidays. This is where many problems begin. When that person leaves your employment, they may try to collect unemployment. If it is determined that you failed to pay overtime, you could get hit with having to pay the shortage in wages plus big penalties and interest.

What are the penalties for noncompliance?

If you neglect to pay nanny taxes, you are violating labor laws and could be charged with expensive penalties as a result.

Risks of paying someone “under the table”

Some people might be tempted to simply pay household employees “under the table” to save time and stress regarding IRS rules and regulations. However, by doing so, keep in mind that once you no longer need your nanny or household employee and let them go, they could file for unemployment benefits, which requires a list of past employers. Once your name is listed as a reference and the unemployment office is unable to find any tax returns that you’ve filed, not only will your past employee not receive benefits, but you may be facing audits from the federal and State government and other possible penalties as well.

Questions? Contact any member of our Tax Services Team.