In our fast-moving world, increasing numbers of busy individuals depend on others for services like child care, house cleaning and lawn maintenance. A lot of these service professionals receive cash payments throughout the year. But when tax time rolls around, what’s next? If you enlist someone to assist you at home with any task, from child care to lawn care, and pay them in cash, when must you pay taxes and how much should it be?
As per the IRS, since 2009, if you pay a caregiver $1,700 or more in a year, a “nanny tax” must be paid. It might seem like an easy solution to avoid this tax by paying entirely in cash. However, various situations – including the service provider applying for Social Security or unemployment benefits – can alert the IRS that you have been neglecting to pay taxes on your employees. This will result in you being billed for the overdue taxes, along with any relevant penalties and fees.
There are certain exceptions to the nanny tax. For instance, it doesn’t apply if your spouse, child under 21, or parent (under certain conditions) takes care of your children. Additionally, if you hire a nanny through an agency and the agency is paying them, taxable obligations generally are not applicable.
So, what exactly is the Nanny Tax?
The nanny tax covers FICA (Social Security and Medicare taxes) and Federal Unemployment Tax. Other taxes may also be owed depending on the state you live in (refer to IRS Publication 926 for more information). In terms of 2011 rates, the employer must contribute 6.2% to Social Security and 1.45% to Medicare. The employee must cover the remaining 4.2% of Social Security and another 1.45% for Medicare under FICA. Usually, just 0.8% will be owed for the Federal Unemployment Tax.
How to pay the Nanny Tax
You have the option to pay the nanny tax quarterly, which is generally preferable if employing a full-time nanny and the $1,700 earning benchmark will be quickly met, or you can file it annually alongside your personal tax return. The latter strategy is more suitable if the nanny tax owed is minimal, for instance, you only paid a nanny or domestic worker a few thousand dollars over a year.
You should be aware that if your nanny earned less than $1,700, you are not obliged to pay their taxes, although you must file a 1099 if they earned between $600 and $1699.
Undeniably, nannies and house cleaners can be a great help in managing your bustling lifestyle. But prior to employing one regularly, ensure you fully comprehend the nanny tax laws and procedures to avoid hefty tax penalties due to missed payments. Seek professional advice to understand all the details before hiring a nanny and to discuss any potential deductions from her regular salary.
