Nanny Tax

What is the Nanny Tax?

People who hire a household employee and pay them wages that exceed a certain limit are supposed to pay Nanny Tax. In the US, it is mandatory for the families to pay Medicare Taxes and social security if the total wages they pay to the household employees go beyond INR 2100 per year. IRS considers you as an employer if you hire a household employee. You have to pay 10-15 per cent tax on the annual wages of your employee. This federal tax is applicable to all household workers, including nannies, cooks, gardeners, caretakers, and more. The family and the household worker are supposed to pay these federal taxes together (50% each).

People who are hired for household tasks, such as cooking, laundry, dish-washing, babysitting, and gardening, are known as household employees. The household workers are subject to federal taxes as they are the taxpayer’s family employees instead of independent workers. That’s the reason they are supposed to pay the Medicare tax, social security, and unemployment tax.

The total amount they are supposed to pay depends on the wages they earn. As mentioned above, the tax is required only if the annual Income of the family employee from the household wages exceed INR 2100. For instance, if you pay your gardener or a babysitter INR 50 every weekend, then you must pay the nanny tax since the annual income of the babysitter will be INR 2,600.

Exceptions for Nanny Tax

The employee is excluded from the Nanny Tax if they are part of the family (parents or spouse). Moreover, the tax is only applicable if the employee is above 18. Note that the tax is not applicable if you have found the household employee from an agency. For example, if you have hired a babysitter or gardener from a household worker agency, then the company will be responsible for paying the nanny taxes. That’s because the agency is the employer and you are supposed to pay the agency rather than the employee.

Other exceptions include a minor who also happens to be a student. The nanny tax is not applicable as long as the household work is not their primary occupation.

Why You Must Pay the Nanny Tax?

It is important for household workers to pay the nanny tax. It offers many social security and Medicare benefits to taxpayers. Besides, it is extremely important if you are planning to apply for a loan. The financial institution will check your legal employment and tax history before accepting your loan application.

Families that hire household workers must file with the IRS and the associated agencies to pay nanny tax. As mentioned above, all employers with household workers are subject to the nanny tax given that the annual wages they pay to these employees exceed INR 2,100. Failure to pay this tax can result in tax evasion charges and other penalties. Both employee and employer are supposed to pay this tax together (7.65% each). In most cases, the employer covers the entire amount.