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While it’s not-so-affectionately known as the nanny tax among taxpayers, the Internal Revenue Service’s tax requirements on household employers are similar to those of a traditional employer. If you employ a nanny -- or any other household worker such as a cleaner or cook -- whom you pay directly, rather than contracting their work through a service, you’re an employer in the IRS’s eyes. As an employer with a tax burden, you’ll need to obtain an Employer Identification Number, or EIN.
You need to obtain an EIN only if the IRS requires you to pay taxes as a household employer. If you paid any nanny who worked from your home more than $1,800 in a year, the IRS requires you to file taxes as an employer. You can get around that requirement by paying a parent, spouse or another child who is younger than 21. Additionally, if you employ a nanny who is younger than 18 years old and isn’t primarily a nanny – such as a student – you aren’t required to pay taxes as a household employer. If your nanny doesn’t fall under these exemptions, you’ll need to pay taxes as an employer and obtain an EIN.
Because every employer must apply for an EIN, the IRS makes obtaining one relatively easy. Applying for an EIN is free and can be done through the IRS’s website weekdays between 7 a.m. and 10 p.m. Eastern time, or by telephone through (800) 829-4993. As a household employer, you’ll register as a sole proprietor, and input only basic information, such as your name, Social Security number and address to complete the application. Upon completing the application process, the IRS immediately issues you an EIN.
The IRS requires household employers to contribute 7.65 percent of their nanny’s earnings to cover payroll taxes, which are Social Security and Medicare. Your nanny owes an additional 5.65 percent of his wages for payroll taxes. You can choose to withhold these from his pay each week, or, to simplify matters, pay them yourself. If you pay them out of your own funds, the additional payment counts as employee income, but isn’t subject to payroll taxes.
If you paid your nanny more than $1,000 in any quarter, you also owe federal unemployment tax, or FUTA, an additional 6 percent on the first $7,000 you pay, as of the 2012 tax year. Employers’ payroll taxes and FUTA payments must come from your own funds and not be withheld from your nanny's pay.
Unlike most employers, as a household employer you’re not required by the IRS to withhold federal income taxes from your nanny's earnings as she earns them. If you don’t, she reports the income on her annual return and pays taxes either annually or in quarterly estimated payments. You can withhold your nanny's income tax if you both wish to, but to do so, obtain a completed Form W-2 from the nanny to get withholding information. At the end of the year, you’ll also need to file a Form W-3 that details the amount of federal income taxes you withheld from her wages.
- Babysitter and little boy playing cops and robbers. image by Jaimie Duplass from Fotolia.com