Many families have gone to great lengths to interview, select and train a domestic employee but are then left wondering just what tax and accounting requirements are required next. They simply do not understand the Social Security tax rules for employers of domestic workers, the “Nanny Tax.” We will explain what your obligations are and please feel free to call Paul Muret for answers specific and unique to your family and situation.
Individuals who hire domestic employees must withhold and pay Social Security taxes (commonly referred to as “FICA” tax) when the wages paid to such employee exceed the dollar threshold (adjusted for inflation) under the Internal Revenue Code. Employers also must withhold and pay federal unemployment insurance tax (commonly referred to as “FUTA” tax) on wages of $1,000 or more paid to a domestic employee in any calendar quarter.
Domestic employees include workers such as nannies, baby-sitters, housekeepers, gardeners, cooks, valets, caretakers, and chauffeurs. Wages paid to a worker under the age of 18 for domestic service in a private home are exempt from Social Security taxes as long as domestic service is not the employee’s principal occupation. For example, the wages of a 16 year-old student who also baby-sits is exempt from the reporting and payment requirements, regardless of whether the amount of wages paid is above the threshold. On the other hand, the wages of a 17 year-old single mother who leaves school and goes to work as a domestic worker to support her family is subject to the reporting and payment requirements, and such earnings above the threshold amount also are wages covered by Social Security
You must report on a calendar-year basis any FICA and/or FUTA tax obligations for wages paid to domestic employees on Schedule H of Form 1040. Any FICA and/or FUTA tax must be paid by April 15 of the year following the year in which the wages were paid, and are included in determining whether the estimated tax penalty may apply. Therefore, to avoid any penalty, you should pay such taxes during the year through withholding from your wages, estimated tax payments, or a combination of both.
