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Nanny Taxes

Keeping Clean with the IRS

By Joe Cooke, J.D., C.P.A.

In addition to the three taxes that can be withheld, there are three employer-paid taxes: Social Security, Medicare and unemployment. For the two FICA taxes, the employer is required to match the employee's 7.65 percent with an additional 7.65 percent, for a total FICA tax of 15.3 percent.

There is a de minimus rule: In 2006, anyone who was paid less than $1,400 was exempt from these taxes. So you don't have to fret over paying taxes for an occasional babysitter. Check IRS Circular E for the current de minimus amount.

The current rate for Federal Unemployment Tax Assistance (FUTA) is 6.2 percent of the first $7,000 of cash wages for anyone to whom you pay $1,000 or more in any quarter of the current or prior year. There is a credit of up to 5.4 percent available if you pay state unemployment taxes, making the net federal rate only 0.8 percent.

Here is a hypothetical example. Let's say you hire Nan on January 1, 2006, to watch your children in your home for about 20 hours a week. The day you hire her, you have her fill out her Form I-9 and W-4. At the same time, you file Form SS-4 on the phone and get your nine-digit EIN. Nan requests you to withhold federal income tax and you agree, but you decide to pick up both portions of FICA yourself.

During the year, you pay Nan $10 an hour or roughly $10,000. At the end of the year, even without any federal income tax withholding, you owe $1,530 in FICA ($765 for the nanny's portion and $765 for your portion) plus $80 in FUTA (assuming you also pay enough state unemployment tax to get full credit). In addition, you withheld about $900 in federal income tax that you now have to remit to the IRS.

Want to see more?

• The Business of Babysitters: Finding the Right Daycare for Your Child
• Help, I'm Being Audited! Tips for Surviving an IRS Audit
• Double Duty: The Secrets of Sharing a Nanny
• Check out our Article Library.
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