Hear the term “Nanny Tax” and most of us think it only applies to rock stars and politicians. After all, their kids have full-time nannies and tutors, right? Don’t let the term “Nanny Tax” fool you, however. Even the average working parent may be obligated to pay Nanny Tax under certain circumstances. Here is a brief primer on the Nanny Tax:
The Nanny Tax is actually a payroll tax, just like the Medicare, Social Security payroll deductions that your employer takes each pay period. You’ll see them on your pay stub as FICA. Typically, these taxes are based on 15.3% of your earnings with an even split between you and your employer; 7.65% is deducted from your check and your employer sets aside 7.65% which is then paid in their quarterly payroll taxes.
The FUTA (Federal Unemployment Tax Act) tax is also deducted from your paycheck and included in the 15.3%. It is contributed to the federal unemployment insurance fund and is paid out in the form of unemployment insurance in case of layoff or job loss. Some states also maintain their own state-based tax (SUTA).
The Nanny Tax works the same way. The IRS considers babysitters, nannies, housekeepers and other household personnel as employees because they must meet a specific set of guidelines in the performance of their job duties: start/finish time, specific tasks in the course of their workday…the same way your employer regards you and your work role.
Does The Nanny Tax Apply to You?
Let’s suppose you found a great sitter for your kid(s) and that person sits for you often. If that person earns $1900.00 or more from you for a given year, you will be required to pay “Nanny Tax” on their earnings since they are considered a household employee under IRS guidelines.
You won’t need to deduct Social Security and Medicare taxes (FICA) if your in-home child care provider is your spouse or other child under 18, or if they baby sitter is under 18.
You won’t need to deduct FUTA if the sitter is your spouse, parent, or minor child.
This is a relief to a lot of working families since many of them rely on other family members for child care.
It’s easy to think of the Nanny Tax as something only rock stars and politicians will need to worry about. After all, “nannies are for rich people.” However, if your child’s sitter earns more than $1900.00 in the course of caring for your children during the year, you, too, will have to pay Nanny Tax payroll deductions.
In the scheme of things, however, it might be seen as a small price to pay for safe, consistent and reliable child care for busy working families.