If you employ a nanny to help care for your children, you probably invested time and energy in background checks, interviews and reference checking. What many parents who hire nannies don't realize is how important it is to make sure you're also taking care of your tax obligations with regard to your nanny. Understanding the nanny tax and your responsibilities under the tax code is an important part of employing any domestic worker.
Identification
The Nanny Tax applies to any household employee who earns more than a certain amount of money annually. In 2009, the Nanny Tax applied to employees who made more than $1,700 for that year. According to the Social Security Administration, if you hire a person to do household work and you control what work they do and how they do it, that person is considered a household employee and subject to the Nanny Tax.
Function
The Nanny Tax is essentially paying into Social Security and related benefits, like Medicare, for your nanny: You withhold from her salary her share of Social Security taxes, which you report and pay to the Internal Revenue Service (IRS) when you pay your own taxes. The general percentage withheld is 15.3 percent of your nanny's total salary.
Benefits
For domestic employees like nannies who are employed by individuals rather than by corporations, the Nanny Tax allows them to collect Social Security and Medicare benefits that accurately reflect their work history. If you haven't paid Social Security for your nanny, she may not be eligible for benefits when she reaches retirement age, even if she's worked long enough to qualify for benefits.
Considerations
Before you pay the Nanny Tax for your nanny, you'll need to have him fill out an I-9 form to prove that he is eligible to work in the United States. You'll also need to visit the IRS website to apply for an Employer Identification Number (EIN) if you don't already have one; you'll need it to fill out the tax paperwork for your nanny. Check with your state's Department of Labor to find out if you have to pay state unemployment taxes and worker's compensation coverage, too.
Expert Insight
"The New York Times" recommends keeping copies of all paperwork involved in your Nanny Tax payments and processing, including pay stubs and tax returns, for at least four years after the date you file your taxes. Because there are several different agencies that can get involved, and managing the Nanny Tax is a complicated process, having all the paperwork available in case of questions is a smart idea.
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