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Why the Nanny Tax Threshold Matters

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Wages paid to domestic workers are often subject to the "nanny tax" threshold, but clients who employ these workers sometimes forget about the nanny tax. In this article, Guy Maddalone of GTM Payroll Services explains how and when the threshold applies and offers guidance on how to keep on top of taxes for household workers.

Nov 19th 2021
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The U.S. Social Security Administration (SSA) recently increased the domestic employee coverage threshold to $2,400 for 2022, up from $2,300 in 2021, marking the third consecutive year the threshold has been increased. The amount is set each year by the SSA, and it serves as a good reminder to check in with your clients who have or may have hired household help this year. 

Nanny Tax Threshold

Commonly called the "nanny tax" threshold, any wages paid to domestic workers at or above that amount triggers Social Security and Medicare (FICA) tax obligations for employers and their employees. For household employees, the amount changes according to the national average wage index. Earnings below this threshold are not taxable under Social Security; however, earnings that exceed the threshold are subject to FICA.

For most industries, there is no coverage threshold, so every dollar of wages is covered and taxable. Household employment, however, is one of the few industries with a coverage threshold. Forgetting about it is understandable but can be costly for your clients.

Not Just for Nannies

While we typically think of domestic workers as nannies, in-home caregivers, housekeepers and estate staff, other workers that can be considered household employees include private educators, tutors, summer nannies and babysitters with regular hours.

Even if your client employs only a part-time or seasonal worker, the nanny tax threshold can be reached. A summer nanny working 40 hours per week at $15 per hour will reach the threshold after only four weeks of work. An after-school nanny putting in 15 hours per week at the same rate will meet the nanny tax threshold just a few months into the school year. If your client hired a private teacher to supervise or supplement virtual learning, the threshold might be reached even if the employee worked for only a few months in 2021.

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