If you employ a nanny and paid him a certain amount of money during the year, $1,700 as of 2010 and 2011, you must pay the household employee tax, also known as the "nanny tax." These taxes must be paid quarterly or you could face penalties come tax time. Fortunately, you have options to make this as easy as possible.
If you are employed, you can file a new W-4 form with your employer to request more taxes be withheld from your paycheck to cover your nanny tax. Alternatively, you can make your own quarterly estimated tax payments using form 1040-ES and sending a check with the payment stubs. Quarterly payments are due April 15, June 15, September 15 and January 15. Finally, if you are the sole proprietor of a business, or your home is a for profit farm, and you already withhold taxes for employees of your business, you may choose to include your nanny tax withholdings with the other withholdings for your business employees. Note, however, that you still may not deduct your nanny's wages as a business expense.
FICA and FUTA
The nanny tax comprises two federal taxes, FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act). FICA, which includes Social Security and Medicare tax, represents 13.3 percent of the wages you pay your nanny. You both owe half of this, 6.65 percent, unless you do not withhold the 6.65 percent from your nanny's wages at the time you pay them. In that case, you owe the full 13.3 percent yourself. FUTA is owed for only the first $7,000 you pay your nanny each year. This tax is normally only 0.8 percent. However, if you fail to pay your state unemployment tax on time, the FUTA rate increases to 6.2 percent.
States allow nanny taxes to be withheld. These taxes are for state unemployment and in some states workers compensation insurance. The percent and forms required differ from state and failure to withhold the appropriate taxes can result in hefty penalties. Check with your state tax center for more information about their requirements.
Federal Income Tax
Withholding federal income tax from your nanny's paycheck is optional and something you should discuss with her. If together you decide to do this, she will need to fill out form W-4 requesting the appropriate amount of withholding. You should then add these taxes to the amount you are withholding for FICA and FUTA. Additionally, you will need to file a W-2 for your employee each year you have withheld federal incomes taxes.