What is a Nanny Tax and Do You Really Have To Pay It?

Here's the scoop on the Employment Tax (aka the Nanny Tax)

Get the scoop on paying your Nanny Taxes
Get the scoop on paying your Nanny Taxes. Getty Images/Adie Bush

The short answer is, yes, you must pay your nanny taxes to comply with federal law. Here's the long answer with more details.

According to the IRS, your Nanny is a household employee because you control what she works on (your children) and how she should take care of them (your daily instructions).  Also, you pay the Nanny, or an adult babysitter, more than a set amount (which the IRS usually changes) every year,

The IRS website states if you paid cash wages of $2,000 or more in 2016 you'll need to play an employment tax (or Nanny Tax).  But if you paid cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 you'll need to pay an unemployment tax.  For more details, like how much of percent you'll need to pay, see the IRS website here.

These rules also cover a housekeeper, gardener or other household workers who earn more than the threshold. So if you pay your child's sitter $35 every week for Saturday night babysitting, you owe NannySocial Security and Medicare taxes.

It's not complicated to pay Nanny taxes, but you do need to set aside some time to make sure you complete the forms correctly. I strongly advise you to pay Nanny taxes if you're over the limit. Not only does it keep you right with the law, your contributions will increase your babysitter's reported Medicare and Social Security pay.

That ultimately should boost any Social Security payments she/he receives in retirement.  This is a perfect example of supporting women in the workforce, even if they are in your own home.

Situations When You Don't Have to Pay:

  • If your nanny is employed by an agency or third party, who controls what work is done and how it is performed.
  • If your child's sitter provides care in her own home, she's generally not your employee.
  • If your child is cared for by your spouse.
  • If your babysitter is a student under the age of 18. (If she's not a student and babysitting is her principal occupation, you owe Nanny taxes.)
  • If your parent cares for your child. (Exception: if you're a single parent or your spouse is physically unable to care for your child, you likely owe taxes.)

Here is step by step instructions on how to paying the nanny tax.

Please note that you also may owe federal and state unemployment tax if you pay a household employee $1,000 or more in any calendar quarter. Contact your state tax agency (listed in an appendix to Internal Revenue Service Publication 926) to learn your unemployment tax obligations.

If you're still confused, please consult your accountant, tax preparer, read IRS Publication 926, or call the IRS help line for household employers at 800-829-4933.  In the IRS paperwork, there is a checklist of paperwork and organizational tips you can follow to be sure that you and your Nanny are covered.

Edited by Elizabeth McGrory.