March 7, 2018

The Nanny Tax

What is the True Cost of Employing Household Staff?

When families hire household help (nannies, caregivers, house cleaners, et al), it is easy to overlook the possibility for the required “Nanny Tax,” the requirement to treat household help as employees and to pay corresponding employment taxes on the wages that are paid to them.

The IRS takes the position that nannies and caregivers are employees because they work a regular schedule and follow specific instructions regarding care for families and/or homes. By contrast, independent contractors determine their own schedules and can make their own decisions about how to manage domestic affairs. In other words, they have more freedom and flexibility with respect to their schedules, allowing them to decide when to show up for work.  Household cleaners and landscape maintenance can potentially fall into this category since they likely have multiple clients, determine their own schedules, and provide their own equipment.

If your household employees are paid $2,000 or more in a calendar year (or $1,000 or more in a calendar quarter for unemployment insurance taxes),  they are subject to the Nanny Tax, which includes Social Security taxes, Medicare taxes (FICA),  employee federal/state income tax withholdings, and payments by the employer.

Misclassification of household employees can be much more serious than families might assume. Families that misclassify their employees as Independent Contractors or pay them under the table could be subject to audit if their employees leave and try to file for unemployment benefits. Penalties may include any of the following: payment of back taxes with fines and interest, liability for employer and employee portions of FICA, tax evasion charges, and even potential loss of professional licenses.

In order to be compliant with the Nanny Tax laws, taxpayers must follow a series of payroll processing protocols, including obtaining employer tax IDs, obtaining documentation from employees, calculating payroll, and filing according to quarterly and annual compliance requirements.

If you have household staff and are unsure if they should be on payroll, please let us know so that we may assist you in reviewing your specific situation and complying with federal and state laws.