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Learn about the different payroll taxes that together make up the Nanny Tax.
The Nanny Taxes, also known as payroll taxes, are a combination of Social Security and Medicare taxes (together known as FICA), as well as Federal (FUTA) and State Unemployment taxes. Your nanny will pay a share of these taxes, through paycheck withholdings. Your share amounts to an additional expense over the cost of your nanny’s gross wages. As the employer, you are responsible for submitting all taxes (even your nanny’s share) to the IRS and appropriate State tax agency.
You owe these taxes on both cash and noncash wages you pay. Measure any noncash wages at the item’s fair market value. However, there are several things you do not need to count as wages. Do not count the following items as wages:
- Meals provided to your employer at your home
- Lodging provided to your nanny at your home for your convenience and as a condition of employment.
- Up to $245 per month in transit passes (or cash reimbursements) used to commute to your home.
- Up to $250 per month for the parking at or near your home.
Nanny Tax Table
| Tax | Nanny’s Share | Your Share | Total |
|---|---|---|---|
| Social Security | 6.2% | 6.2% | 12.4% |
| Medicare | 1.45% | 1.45% | 2.9% |
| FUTA | 0 | 0.6%* of wages up to $7,000 | 0.6% |
| State Unemployment | 0 | Varies | Varies |
Social Security and Medicare (FICA) Taxes
Social Security and Medicare taxes make up the bulk of the employment taxes, totaling 15.3% of wages. Your are required to collect and pay the FICA taxes if you pay your nanny $2,000 or more during the calendar year. When negotiating wages with your nanny, it is important to be upfront about whether you are discussing gross pay (before tax deductions) or actual take-home pay. Don’t let your nanny be surprised by the first paycheck. The pay stub calculator can help.
Federal Unemployment Taxes
If you pay wages of $1,000 or more in any one quarter, then you owe unemployment taxes to the Federal and State Government. Unemployment taxes are paid completely by the employer, but they are typically much less than FICA taxes.
The Federal Unemployment tax (FUTA) starts at 6.0% of wages paid up to $7,000. However, by paying your State Unemployment taxes your Federal rate is reduced* down to 0.8% between January 1 and June 30, 2011. From July till the end of the year, the rate drops to 0.6%. The maximum FUTA you should pay is $56. If you don’t pay your State Unemployment taxes (which you are required to do, this isn’t a choice between one or the other), you could face an increased FUTA bill of up to $434.
* Residents of Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, New York, North Carolina, Ohio, Rhode Island, and Wisconsin unfortunately get less of a FUTA reduction by paying their state taxes. These states borrowed money from the federal government to pay for unemployment benefits and have not paid Washington back yet. As a result, the patriotic household employers in these states will have to bear a slightly larger FUTA burden.
State Unemployment Taxes
Here’s where payroll taxes get even less straightforward. Each State has a different tax rate and wage cap. That tax rate also varies depending on how long you have been an employer and if previous employees have filed claims against you. The average State unemployment tax bill is about $408, though it varies greatly from State to State. The payroll tax calculator will help you determine your unique tax situation.
Next step: The Nanny Tax Checklist