Nanny Tax Definition Why And How To Pay Nanny Taxes

Nanny Tax Definition

Nanny Tax refers to the tax that an individual pays to the government when they employ household employees such as gardeners, housekeepers, babysitters, and cooks as per US Law and UK Law.

Suppose a family hires a housekeeper for housekeeping service, and his wages are $4000 yearly. The family will deduct some as social security medicare taxes and federal and state income tax and pay it to the government. The family will also pay social security medicare taxes and federal and state unemployment insurance to the government.

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Why Pay Nanny Tax?

There are some important reasons why one should pay the nanny tax.

It is a legal requirement of a family or individual who hires house workers.It can provide childcare tax credit benefits.It provides social security at the time of retirement of household employees.If an individual removes his cook, the cook can get unemployment benefits for losing his job.If an individual pays taxes legally, his house worker can get a medical care subsidy.Paying a nanny tax will motivate the worker.If an individual pays tax regularly and legally, his workers will be eligible for medical care after retirement.

How are Nanny Taxes Paid?

There are two kinds of taxes that require to be paid.:

Taxes withheld from household employees such as social security medicare taxes, also known as FICA taxes, and the same amount employers will also pay to the government.Employers will also pay Employment tax, such as federal unemployment insurance tax. Then the employer will file the return on a monthly basis, annually, or quarterly basis.

Steps to Handle Nanny Tax

The employer should first have his identification number, which he can obtain from the IRS.

How do I know if I need to Pay Nanny Tax?

If you hire a cook, babysitter, gardener, housekeeper, any person for household work, and pay wages, which falls under the provision of law, then you need to pay nanny taxes.

Before hiring a housekeeper, the employer must obtain the following documents. • Employers must take the Housekeeper’s social security number or ITIN.• Employers need to obtain a completed form of Form I-9 with the correct identification number from housekeepers because Form I-9 shows the eligibility of a household worker.• Employers must obtain a federal W-4 form and a state income tax withholding form. An employer needs to obtain a tax ID number. An employer needs to obtain a tax ID number, such as federal and state identification numbers, from the respective tax department of that state. Calculate taxes withheld from worker and employer taxes Calculating taxes withheld from worker and employer taxes based on wages paid to household employees would be best. This can be done by hiring some experts or employers. Employers will pay withheld tax along with their income tax to avoid penalties on the underpayment of tax. File the return either quarterly, annually, or monthly You need to file the return quarterly, annually, or monthly as per the prevailing law of that state and send Form 1040 about the estimated payment to the IRS four times per year. An employer must provide Form W-2 to his household employees at the end of Jan each year so that employees can use it to file their tax returns. • File Form W-3 as per social security administration and submit form W-2 part A.• Prepare Schedule H; employers must fill it with their federal income tax.• Prepare the Annual reconciliation statement that summarizes withheld tax from a nanny.• Employers must keep track of any changes in nanny taxes.• Employers need to reply to any federal or state notices.

• Employers must take the Housekeeper’s social security number or ITIN.• Employers need to obtain a completed form of Form I-9 with the correct identification number from housekeepers because Form I-9 shows the eligibility of a household worker.• Employers must obtain a federal W-4 form and a state income tax withholding form.

An employer needs to obtain a tax ID number, such as federal and state identification numbers, from the respective tax department of that state.

Calculating taxes withheld from worker and employer taxes based on wages paid to household employees would be best. This can be done by hiring some experts or employers. Employers will pay withheld tax along with their income tax to avoid penalties on the underpayment of tax.

You need to file the return quarterly, annually, or monthly as per the prevailing law of that state and send Form 1040 about the estimated payment to the IRS four times per year.

• File Form W-3 as per social security administration and submit form W-2 part A.• Prepare Schedule H; employers must fill it with their federal income tax.• Prepare the Annual reconciliation statement that summarizes withheld tax from a nanny.• Employers must keep track of any changes in nanny taxes.• Employers need to reply to any federal or state notices.

Let’s understand this concept with the help of some examples.

Example #1

Suppose a family hires a cook, and if the employer pays wages more than $2100 in a year, then the employer is required to withhold tax. Social security medicare taxes, also known as FICA @ 7.65% of cash wages, and the employer will also pay 7.65% FICA taxes.

Suppose the family pays wages of $1000 or more per quarter to its household employees, then the employer must pay 6% of the first $7000 wages per employee as federal unemployment taxes.

Example #2

Nanny tax deduction

Suppose a family hires a house cleaner and pays him wages, then employers need to withhold taxes such as social security medicare taxes, and the same amount the employer will also pay as FICA taxes.

Examples of nanny taxes are social security, medicare, and federal unemployment taxes.

Advantage

Conclusion

Nanny tax is the legal duty of each household employer who hires household employees. Each employer should follow the government’s guidelines, pay nanny taxes regularly, and file their return to avoid being unethical. Each employer should maintain proper books of accounts for better control purposes.