Figuring out a client’s nanny taxes and payroll is likely not at the top of your holiday wish list. If your client hasn’t been maintaining accurate time and pay records, it can be especially time-consuming and frustrating. That’s why we recommend getting started with nanny taxes sooner rather than later. Following this step-by-step guide will also help keep you organized and on track.
1. Find out if your client owes nanny taxes
If your client paid a household employee like a nanny, housekeeper or senior caregiver $2,100 or more this year, then they owe FICA taxes. This is your client’s contribution to their employee’s Social Security and Medicare accounts.
Wages paid to a client’s spouse or child under 21 years old, or any employee under the age of 18 are not counted.
Also, if your client paid an employee $1,000 or more in any calendar quarter during 2018, then they owe federal and state unemployment taxes.
2. Update employee information
Make sure you have the correct legal name, Social Security number, and address of your client’s employee. W-2s are due by the end of the January. It’s best to make updates now than encounter issues with a W-2 because of wrong information.
3. Review hours worked
If your client has kept accurate time records or used an automated time-keeping solution, this step can be relatively painless. Make sure all hours worked have been paid. Keep in mind that household employees are to be paid the highest minimum wage rate of federal, state, and local rates. With a few exceptions, they also receive overtime of time-and-a-half for hours worked over 40 in a week.
This will help you confirm actual wages paid to the employee when you complete their Form W-2 (Wage and Tax Statement).
Don’t breeze through this step. Not paying a household employee at least minimum wage and overtime when required can lead to bigger compliance issues and legal headaches for your client.
4. Calculate your client’s tax obligation
Now it’s time to figure out your client’s nanny tax responsibility. They owe 7.65 percent of their employee’s cash wages in FICA taxes. This breaks down to 6.2 percent for Social Security and 1.45 percent for Medicare.
Federal unemployment tax is six percent on the first $7,000 of gross wages. They may also owe state unemployment tax, which varies by state and is typically from two to five percent of a set amount of wages.
You’ll need to know this information to complete Schedule H (Household Employment Taxes), which is filed with your client’s personal return.
Unless they have been remitting estimated taxes quarterly, they will owe the entire amount when they file.
5. Determine what has been withheld for the employee
Now it’s the employee’s turn. They will owe the same amount – 7.65 percent – in FICA taxes. They also owe federal and state (if applicable) income taxes.
While it’s not required to withhold income taxes from a household employee’s pay (FICA taxes must be withheld), it’s helpful if your client has been withholding these taxes on a regular basis and remitting them quarterly. If not, their employee will owe the entire amount when they file their personal tax return. That can be difficult for some employees who may not have budgeted hundreds or thousands of dollars to pay their tax obligations when they file their return.
You’ll need to know how much has been previously withheld in taxes in order to complete Form W-2.
6. Complete wage and tax forms
As mentioned, Form W-2 is due to the employee by January 31. That’s the same deadline that Form W-3 and Copy A of Form W-2 must be submitted to the Social Security Administration.
7. Complete Schedule H and Form 2441
Once you’ve finished Schedule H, attach it to your client’s personal tax return. Your client may be eligible for a tax credit on the wages they paid a nanny. Use Form 2441 (Child and Dependent Care Expenses) to claim the credit.
I hope you can see why it’s a good idea to get started on this now and not wait until tax filing season is fully underway to start figuring out your client’s nanny taxes.
About Guy Maddalone
Guy Maddalone has more than 30 years of experience in the payroll, human resource, and employment services industries. In 1991, he founded GTM Payroll Services to provide payroll, tax, compliance, and insurance administration for families that hired a nanny or other household employees. Guy is also the author of How to Hire a Nanny and How to Hire a Caregiver for Your Senior.