15 Steps to Follow When Preparing to Pay the Nanny Tax

Easy instructions for W-2 and W-3 forms

Woman giving her daughter to nanny
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The IRS requires anyone with household help, such as a nanny, babysitter, or housekeeper, to pay Social Security, Medicare, FUTA (Federal Unemployment Tax Act) and federal and state income tax if their annual pay crosses over a certain threshold, which as of 2015 was $2,000.  

For example, if you pay an adult babysitter $35 every Saturday night, you must pay the nanny tax. Not only is it illegal to skip the nanny tax, it's unfair to the person who's caring for your child.

You're potentially costing her or him future Social Security and Medicare benefits by failing to honor the nanny tax.

You'll need the Household Employers Tax Guide (IRS Publication 926), the official IRS Forms W2 and W3 (call 800-TAX-FORM to order them), a record of wages paid to your nanny for the year, your nanny's Social Security number and address, your household employer identification number (EIN), and last by not least a calculator and pen and paper.

The following instructions cover paying Social Security and Medicare taxes. Read the Household Employers Tax Guid (IRS Publication 926)  to see if you owe federal unemployment tax (FUTA) and check with your state to see if you owe state employment taxes.

Decisions to make during your nanny hiring process

When you hire a nanny or regular babysitter be sure they can legally work in the United States by examining their documentation and filling out a Form I-9, "Instructions for Employment Eligibility Verification"

Decide how to handle the federal income tax. Come to an agreement with your nanny about whether you, the employer, will withhold federal income tax. You are not required to do so, but any change to the agreement must be in writing. (Federal tax withholding is not covered by this article.)

Investigate if you will owe state employment taxes.

Each state is diffferent (State employment taxes are not covered by this article.) The relevant state agencies are listed in an appendix to IRS Publication 926.

Decide whether you are going to pay your nanny's share of Social Security and Medicare taxes, or deduct it from her pay. Next explain your decision to your nanny. If you agreed on an hourly pay rate without discussing that you'll be deducting these employment taxes to pay the nanny tax, she'll be in for an unpleasant surprise!

M edicare and Social Security taxes amount to 15.3 percent of her pay. Half of that, 7.56 percent, is the employee's share, which you withhold from each paycheck (or pay yourself, if that's how you decide to handle it). You, the employer, send both halves of the tax to the federal government.

Decide how you will pay the nanny tax

One choice is to ask your own employer (or your spouse's employer) to withhold more from your wages in order to cover household employment taxes. Or, you can make estimated tax payments to the IRS each quarter. Another option is to pay the nanny tax on April 15 with your income tax, but if the amount is large enough you might be subject to penalties.

Keep records of all payments to your nanny whether cash or check.

At the end of the calendar year, add up all the money you've paid your nanny.

If you do not have an EIN number be sure to contact the IRS before February to be assigned an employer identification number. You can call 800-829-4933, apply online, apply by fax or apply via mail.

By the beginning of February, you must fill out a W-2 form and give copies to your nanny.

Minimum required information for W-2 and W-3 forms

On Form W-2, put the employee's Social Security Number in box a. Put your employer identification number in box b. Put your name and address in box c. Put your employee's name and address in box e.

On Form W-2, write the total wages you paid boxes 3 and 5. (For the purposes of this example, I assume that you decided to pay your nanny's share of the taxes rather than withhold from her paycheck.) Multiply the total wages by 6.2 percent and write the answer in box 4.

This is the employee's share of Social Security tax. If you also withheld federal income tax, it should go in box 2.

Now, multiply the total wages (box 3) by 1.45 percent and write the answer in box 6. This is the employee's share of Medicare taxes. Add together the figures in boxes 2, 3, 4 and 6 and put the total in box 1. Are you worried about your math?  Go check out the instructions for Schedule H,  for a great example with the boxes filled in. A Schedule H is a document for figuring your household employment taxes.

Last, copy the information onto the duplicate copies of Form W-2 and congratulations you're don! You're ready to give Form W-2 to your nanny and keep Copy A for yourself.

On Form W-3, copy the numbered boxes from Form W-2 into the corresponding boxes. (Thank you, IRS, for making the numbers the same!) Fill in your name, address, phone number and employer identification number. Check the box that says "Hshld.emp." to indicate that you're a household employer. Sign and date the form.

What to do at tax time

Before March, send the Form W-3 and Copy A of the Form W-2 to the Social Security Administration.

By April 15, file Schedule H with your federal income tax return (Form 1040). The figures on Schedule H for Medicare and Social Security taxes should be double the figures on the W2, because you're paying the employee's share plus the employer's share.

Some tips and tricks

Keep copies of all your records. Place your completed Forms W-2 and W-3 near the top of the file so you can easily copy the information that stays the same from year to year.

If you want to avoid scrambling to pay these taxes put aside 15.3 percent of every paycheck you give your nanny.  This way you have the dough to pay Medicare and Social Security taxes when they're due.

Make sure you use the official IRS Forms W-2 and W-3, which are scannable. If you submit copies you printed from the Internet you may be subject to a penalty.

Edited by Elizabeth McGrory