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The Nanny Tax
The “Nanny Tax” applies to nannies, housekeepers, maids, baby-sitters, gardeners or other household employees who are not considered to have their own business (said another way - they are not independent contractors).
If you hire one of these folks, then they are subject to the “Nanny Tax”. This means that you will have some additional reporting requirements on your personal return as well as some additional taxes that either needs to be paid in quarterly through estimates, or you should have additional withholding on wages.
You are not required to withhold federal or state income taxes unless you both agree to do so. If you do agree to this, then you will need to have the employee fill out a Form W-4 so that you can calculate and withhold the correct amount of income tax. You may be required to withhold social security and Medicare tax (FICA) and you may also be required to pay federal unemployment (FUTA) tax. The FUTA this is paid by you as the employer and is not withheld from the employees’ wages.
FICA (Social Security/Medicare): You have to withhold and pay FICA taxes if your household employee earns cash wages of $1,700 or more during the calendar year 2010. You should start withholding at the beginning of employment if you expect to meet the annual threshold of $1,700. If you are not sure if the annual threshold will be met, you can still withhold from the start. If it turns out the annual threshold isn't reached, just repay the withheld amount.
As an employer, you are responsible for withholding the employee’s share of FICA. In addition, you must pay a matching amount for your share of the taxes. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2% for both the employer and employee for a total rate of 12.4%. The Medicare tax is 1.45% for both the employer and employee for a total rate of 2.9%
FUTA (Federal Unemployment Tax): You also have an obligation to pay (but not withhold) FUTA taxes if you pay a total of $1,000 or more in cash wages to your employee in any calendar quarter of the current year or last year. The FUTA tax applies to the first $7,000 of wages paid.
Reporting and paying: You pay the “Nanny Tax” taxes by increasing your quarterly estimated tax payments or increasing the withholding from your wages, rather than making an annual lump-sum payment.
As an employer of a household employee, you don't have to file any of the quarterly employment tax returns, even if you're required to withhold or pay tax. Instead, you just report the employment taxes on your tax return, Form 1040, Schedule H. Your state of residence will also have an annual form for you to complete to report state unemployment and any state withholding.
On your income tax return, you must include your federal employer identification number (EIN), and your state identification number if you were issued one. The EIN isn't the same number as your social security number. If you need an EIN, you must file Form SS-4 to get one; each state has an application form as well to apply for a state number.
If the employee’s 2010 wages are subject to FICA or income tax withholding you will need to issue them a Form W-2. This form also needs to be filed with the Social Security Administration. Your federal and state ID numbers must be included on the Form W-2.
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