When it comes to working in people's homes, the working arrangements are often casual and wages are paid out in cash. This grey area can lead to confusion for both parties, but determining if a nanny or home-care giver is considered a household employee can make tax filing simpler for everyone involved.
- Social Security credits
- Federal unemployment tax
- Federal income tax withholding
- Self-employed caregivers
- What if household employers contribute to health care coverage?
- Can household employees qualify for tax credits?
- What are the tax consequences of working as a babysitter?
- Avoiding a big tax bill and penalties
Taxes for household employees
If you're a nanny or other worker who cares for others' children in their employer’s home and you have specific job duties assigned to you, the IRS considers you a household employee, not an independent contractor. This is because the IRS partially determines your employee status by the level of control and direction your employer provides.
As a result, you have an employer-employee relationship in the eyes of the IRS. If you're the employer of a household employee, you have a responsibility to withhold and pay certain taxes on their behalf, including the "nanny tax."
If you work as a nanny, self-employed babysitter, or other household caregiver — or you employ one — you'll want to know how to properly prepare your taxes.
What is the nanny tax?
The nanny tax is a combination of federal and state taxes families must pay when they hire a household employee, such as a nanny or senior caregiver:
- Taxes paid by the employee: Federal and state income taxes as well as FICA taxes (Social Security and Medicare)
- Taxes paid by the employer: FICA taxes as well as federal and state unemployment insurance
For tax year 2023, FICA taxes will be applicable if a family paid you at least $2,600 in the year and unemployment insurance taxes will have to be paid for wages of more than $1,000 in a calendar quarter. The annual total for FICA for 2022 is $2,400.
If you hired a household employee and exceeded these thresholds, you'll be responsible for paying and reporting employment taxes, including filing Schedule H with your federal tax return.
A few exceptions exist. If you're under the age of 18 or work through a child care agency, you wouldn't be considered a family's employee.
Social Security and Medicare taxes
During any calendar year in which your employer pays you more than a specified amount — $2,400 in 2022 and $2,600 in 2023 — they must collect and pay the employer portion of Social Security and Medicare taxes on your behalf. The same is true if your household employer pays you $1,000 or more during one calendar quarter.
As an employee, you're responsible for paying half of the tax (which your employer should withhold from your paycheck), and your employer must pay the other half. Some employers might voluntarily cover both portions and not withhold any of it from your pay.
If you think a family hired you as an employee but your household employer thought you were a self-employed person, you may need to attach Form 8919 for Uncollected Social Security and Medicare Tax on Wages. By filing this form, your Social Security earnings will be credited to your Social Security record.
Social Security credits
In addition to paying Social Security and Medicare taxes, your employer must also report your wages to the Social Security Administration. To be eligible for Social Security, disability benefits, or Medicare benefits in the future, you must earn eligibility credits during your working years. As a household employee, you'll earn:
- One credit for every $1,640 you make in 2023 or $1,510 in 2022
- Up to four credits per year
Federal unemployment tax
If your employer pays more than $1,000 in any quarter of the current year (or the previous year) to their household employees collectively, they're responsible for paying the 6% Federal Unemployment Tax, or FUTA, on the first $7,000 in wages for each household employee. You don't pay this tax; your employer pays it.
If your employer also pays for your state unemployment insurance taxes, Schedule H provides the employer credit for them and reduces the FUTA rate accordingly.
Federal income tax withholding
The IRS requires you to pay income taxes throughout the year as you earn income, not just at the tax filing deadline. In most cases, employers do this by withholding money from your paychecks for taxes and sending it to the IRS on your behalf.
Unfortunately, household employers aren't required to do this, so you could end up with a big tax bill at the end of the year if you don't set aside money. Learn about making estimated quarterly tax payments to avoid a big tax headache when you file.
If you don't meet the annual payment limit or $1,000 in a calendar quarter threshold, you'll likely be classified as a self-employed person. In this case, you might receive a Form 1099-NEC if you earned between $600 and $2,600 in 2023 or $2,400 in 2022. Regardless of whether you receive a Form 1099-NEC, you will need to report your income on Form 1040, Schedule C. This schedule is for reporting profits or losses from a business.
You'll also use Schedule SE, Self-Employment Tax for reporting the Social Security and Medicare tax you must pay on your net earnings from self-employment.
What if household employers contribute to health care coverage?
Household employers can choose to contribute toward your health care coverage costs. They can contribute directly to your individual policy and treat that money as nontaxable income.
Your household employer can also contribute to other health care coverage plans and arrangements for your benefit.
Can household employees qualify for tax credits?
If you work as a household employee, you may qualify for a special tax credit for low-to-moderate-income workers, the Earned Income Credit (EIC). This credit can lower your taxes and may result in a refund. The EIC has specific qualifications and income limits, so you'll have to do some research to see if you're eligible.
Household employers, on the other hand, can qualify for the Child and Dependent Care Credit.
For 2023, this credit can reduce the cost of child care expenses from hiring a nanny and can be worth as much as 20% to 35% of up to $3,000 of child care or similar costs for a child under 13, or up to $6,000 for two or more dependents.
For 2021, the American Rescue Plan brings significant changes to the amount and way that the Child and Dependent Care Credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable. This means that, unlike in other years, you can still get the credit even if you don’t owe taxes.
For tax year 2021:
- The amount of qualifying expenses increases from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
The CARES Act required household employers to provide sick and family leave to household employees in the event of illness. If household employers had to cover these family and sick leave pay costs, they can take a dollar for dollar tax credit and reduce the amount of money paid when sending the IRS employment taxes for the household employee.
What are the tax consequences of working as a babysitter?
Like a nanny, the IRS considers babysitters household employees if you exceed the annual income threshold for the year. Your employer will need to withhold taxes on your behalf unless you're under the age of 18 or meet other exceptions to this rule, such as working for an agency. If you earn beneath this income level, you qualify as a self-employed person.
If your employer pays you in cash without any withholding or records, you should have a conversation about your respective tax responsibilities. Not counting these payments as income on a tax return could result in tax liability later.
Avoiding a big tax bill and penalties
To avoid an end-of-year tax bill or penalties for not paying taxes as you earned your income, you can ask your employer to withhold federal income tax from your paycheck. They must be willing to do this voluntarily since it isn't a requirement.
To determine how much to withhold, you can fill out IRS Form W-4, or you can make estimated tax payments. Use the IRS Form 1040-ES to figure out your estimated taxes or TaxCaster free tax estimator to estimate how much to withhold from your pay.
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