New working parents often ask whether they have to pay nanny taxes. Generally the answer is yes, you must pay nanny taxes to comply with federal law.
You owe nanny taxes if you pay the same adult babysitter more than a set amount every year, which was $1,700 for 2010 and 2011. The same holds for a housekeeper, gardener or other household worker who earns more than the threshold. So if you pay your child's sitter $35 every week for Saturday night babysitting, you owe nanny taxes -- more formally, Social Security and Medicare taxes.
It's not complicated to pay nanny taxes, but you do need to set aside some time to make sure you complete the forms correctly. I strongly advise you to pay nanny taxes if you're over the limit. Not only does it keep you right with the law, your contributions will increase your babysitter's reported Medicare and Social Security pay. That ultimately should boost any Social Security payments she receives in retirement.
There are a few cases in which you don't have to pay nanny taxes:
- If your nanny is employed by an agency or third party, who controls what work is done and how it is performed.
- If your child's sitter provides care in her own home, she's generally not your employee.
- If your child is cared for by your spouse or your child under the age of 21.
- If your babysitter is a student under age 18. (If she's not a student and babysitting is her principal occupation, you owe nanny taxes.)
- If your parent cares for your child. (Exception: if you're a single parent or your spouse is physically unable to care for your child, you likely owe taxes.)
Here are step by step instructions to paying the nanny tax.
Please note that you also may owe federal and state unemployment tax if you pay a household employee $1,000 or more in any calendar quarter. Contact your state tax agency (listed in an appendix to Internal Revenue Service Publication 926) to learn your unemployment tax obligations.
If you're still confused, please consult your accountant or tax preparer for help. Or, read IRS Publication 926 or call the IRS help line for household employers at 800-829-4933.