Payroll
2025-03-10 17:26

Our nanny lives with us and cares for our child. How can we formalize this relationship? Do we need to pay taxes and submit reports?

Short Answer: Yes, you must formalize the relationship as a household employer and pay nanny taxes.

Full Answer: Since your nanny lives in your house and helps with your child, she is considered a household employee (not an independent contractor) under the IRS guidelines. To formalize the relationship and comply with tax laws, follow these steps:

Obtain an Employer Identification Number (EIN):

  • Apply for an EIN online at the IRS website to report nanny taxes.

Complete Form I-9 (Employment Eligibility Verification):

  • Verify your nanny's identity and authorization to work in the U.S.
  • Keep the completed Form I-9 on file (do not submit it to the IRS).

Payroll and Tax Withholding:

  • If you pay your nanny $2,600 or more in 2024, you must withhold and pay:
  • Social Security and Medicare taxes (FICA):
  • 7.65% withheld from the nanny’s wages.
  • 7.65% paid by you as the employer.
  • Federal Unemployment Tax (FUTA):
  • 6% on the first $7,000 of wages, reduced if you pay state unemployment tax.
  • Income Tax Withholding:
  • It's not required but can be withheld if your nanny requests it by completing Form W-4.

Submit Payroll Taxes and Forms:

  • Form W-2:
  • Issue to your nanny by January 31 of the following year, showing wages paid and taxes withheld.
  • Form W-3:
  • File with the Social Security Administration (SSA) along with the W-2.
  • Schedule H (Form 1040):
  • Report Social Security, Medicare, and federal unemployment taxes. Attach this form to your tax return.
  • Quarterly Estimated Taxes:
  • Make estimated tax payments if withholding is not sufficient.

State Tax Requirements:

  • Check state-specific requirements for state income tax and unemployment insurance. You may need to register with your state's labor department.

Workers’ Compensation Insurance:

  • Some states require workers' compensation insurance for household employees. Verify state laws to avoid penalties.

Employment Contract:

  • Prepare a written contract specifying:
  • Duties and hours.
  • Salary and payment schedule.
  • Benefits and paid time off.
  • Tax withholding agreement if applicable.

Penalties for Non-Compliance:

Failure to withhold and pay nanny taxes can result in IRS penalties and interest charges. Maintaining proper payroll records and submitting the necessary forms on time is essential.

General Federal Standard: Household employers must comply with the Nanny Tax rules under IRC Section 3510 and report employment taxes using Schedule H.
PAYROLL