When hiring a nanny, planning for a few tax implications is essential. There is a common misconception that a nanny is an independent contractor, which would require providing him/her with a 1099 at the end of the year for taxes. However, this is not true.
Per the IRS, a nanny, or any household employee, is your employee; therefore, as an employer, you need to issue a W-2 and file your federal and state taxes accordingly.
The Household Employee Guide to Use When Hiring a Nanny
IRS Publication 926 lays out the household employee guidelines to determine:
- If the person you have hired is considered a household employee
- Federal tax compensation thresholds
- What federal taxes you will pay
- And more!
To start, someone is considered your employee if you control what/how work is done. This applies to part-time and full-time workers. As a result, if a nanny watches your children in your home, you most likely have a household employee.
File for an EIN
Once you hire a nanny, you must file for an EIN on the IRS website. This is a free and easy process. At the federal level, if your nanny’s compensation exceeds the IRS threshold, as listed in Publication 926, you are responsible for paying Social Security, Medicare, and FUTA tax.
The employee share of the Social Security and Medicare taxes and federal income taxes can be withheld from your nanny’s paycheck. However, you cannot withhold the employer share of Social Security and Medicare taxes or FUTA tax. Keeping adequate records is vital, and there are multiple ways to do this. You can outsource payroll to a nanny payroll company, or you can process payroll yourself.
By January 31st of the following year, you need to provide your nanny with their W-2 and submit it to the SSA along with form W-3. By April 15th, if no extension is filed, you will attach Schedule H to your Form 1040 to submit and pay your household employer taxes and any taxes withheld from your employee’s wages.
Pay Taxes Throughout the Year to Avoid an Underpayment Penalty
You are not required to file quarterly reports with the IRS. However, you want to ensure you pay enough taxes throughout the year to cover your household employer taxes. Otherwise, you could receive an underpayment penalty. Two common ways to do this are to ask your employer to withhold more federal income taxes from your wages throughout the year, or to make estimated tax payments.
State reporting varies by state and is different than the federal reporting rules. In New Hampshire, you are required to:
- Register with the State as an Employer
- Report any new hires within 20 days of hire
- Have an active household employer workers’ compensation policy
- File & pay quarterly State Unemployment taxes
To maximize the FUTA credit you may be eligible for, make sure you pay your State Unemployment taxes on time!
When hiring a nanny, remember they are considered a W-2 employee! Plan for the federal and state reporting, tax, and insurance requirements early to avoid surprises later in the year.