Who is Required to Calculate and Pay "Nanny Taxes"?
IF you pay a household employee $1900 (2014) or more in a year, you are required to pay payroll taxes. Although commonly referred to as “nanny taxes”, these taxes apply to all household employees including housekeepers, babysitters and elder care workers. YOUR employer payroll tax obligations typically total 10 - 11% of gross wages and include:
• Social Security & Medicare Taxes (7.65% of Gross Wages) Employer Contribution [FICA taxes]
• Federal Unemployment Tax (FUTA) (0.6% of Gross Wages in Most Circumstances)
• NYS State unemployment taxes
• NYS requires employers to obtain workers’ compensation and disability insurance policies. Your household employee contributes to or pays:
• Social Security & Medicare Taxes (7.65% of Gross Wages Collected and Remitted by Employer)
• Federal/ State /Local Income Taxes
- TIP! The employer is solely responsible for the remittance of ALL the Social Security and Medicare (payroll) taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. Many employers choose to pay the nanny’s portion of the Social Security and Medicare tax for the employee rather than deduct – this is perfectly legal.
When you hire a nanny you become an employer and you are required to complete paperwork for the Federal government, your state and for your own records. The steps are outlined below.
• Verify Employee’s Social Security Number: Typically, SSN verification is performed as part of a pre-employment screening package. Alternately, you may register with the Department of Homeland Security’s eVerify program and run this check free of charge. HWS will perform this check for enrolled clients for a small administrative fee.
• Verify Employment Eligibility: You may legally hire a U.S. citizen, an alien lawfully admitted for permanent residence, or an alien with a valid work perm it. You are required to verify your candidate's employment eligibility using Form I-9. Aliens with a valid work permit are eligible for and should have a valid Social Security Number. Retain Form I - 9 for 3 years after its signing date or one year after t he end of employment, whichever date is later. (NOTE: If you hire a nanny who is not authorized for work in the US, you are in violation of immigration law; moreover, you remain legally obligated for all employment taxes described in this guide.)
• Document Compensation Agreement: Many states have implemented Wage Theft Prevention Acts which require the employer to provide a Pay Rate Notice at time of hire that documents both the regular hourly rate of pay and the overtime rate of pay. (See Appendix C for a sample Pay Rate Notice.) Your household worker must be paid at no less than the minimum wage. Discuss wages and taxes with your employee. Make sure you and your employee are in agreement about tax responsibilities and withholdings. Best practice is to document all compensation issues in a formal work agreement. You may view sample work agreements at the 4nannytaxes.com website.
• Obtain Federal Employer Identification Number (EIN) 1: All US employers must have an EIN for tax and wage reporting. All taxing authorities, state and federal, use your Federal EIN as part of your account identification.
• Register for State Employment Tax Account(s) 2, both unemployment and withholding tax (if applicable).
• Prepare and File New Hire Report 2
• Obtain Workers’ Compensation and Disability Insurance: Many states require employers to obtain Worker’s Compensation & Disability Insurance policies – this is not part of your homeowners’/renters’ insurance policies. Consult your casualty insurance agent or the phone HomeWork Solutions for further guidance.
Explore Tax Credits: If you plan to claim a tax credit for child/dependent care expenses, the employee should complete Form W-10 Dependent Care Provider’s Identification and Certification (available at 4nannytaxes.com). Keep a copy of this completed form in your files.
• Calculate Employee Income Tax Withholding: If you plan to withhold income taxes for your employee, the employee should complete Form W-4 Withholding Allowance (available at http://nannytaxcalculator.blogspot.com/). If you need more information about withholding taxes, we maintain a payroll tax calculator at this web site.
How to Pay your Nanny
Pay frequency for household workers is determined by state law, and the payroll must be based on anhourly rate of pay. Hourly rates must be broken out by the regular hourly rate and the overtime hourly rate. Wages cannot be stated as a weekly salary. Details on calculating hourly pay rates are found in our calculator page.When negotiating wages with your employee, you must distinguish gross and net wages: gross wages are the amount of wages before deductions for employee taxes and other deductions; net wages are wages after deductions, or the ‘take home’ amount of the paycheck. Details on calculating gross versus net wages are also found in our calculator page.You must...
• Define the work week– Saturday through Friday for example. This must remain constant once established.
• Keep accurate and contemporaneous record of days and hours worked.
• Pay on the established pay frequency. If you will be unavailable to make your payment on the regular pay date, you must make the payment in advance.
• Establish the hourly pay rate.
• For the live out domestic, you must pay the overtime rate for hours worked in excess of 40 in the work week. State law determines whether your live in domestic is entitled to the overtime differential – live in domestics are not covered by the FLSA’s overtime provisions.
• Determine the gross wage for the pay week by multiplying regular hours by the hourly pay rate and overtime hours by the overtime pay rate. The sum of the regular and overtime pay is the gross wage.
• Calculate Social Security & Medicare tax withholding. Employers may choose to withhold the employee’s contribution from the worker’s gross pay or may elect to pay both the employer and employee contributions from their own funds. Remember, if you do not collect the employee’s contribution via payroll deductions, you are 100% responsible to make these payments to the IRS from your own funds. Employers paying their employee’s share of payroll taxes must include these taxes as income on the employee’s Form W-2 Wage and Tax Statement at the end of the year.
