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How To Pay the Nanny Tax - Easy Instructions for Forms W-2 and W-3

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Nanny tax

Get your papers together to pay the nanny tax

Photo credit: Anthony Masterson/Getty Images

Important note: for the tax years 2011 and 2012, the IRS reduced the rate for the employee's share of Social Security taxes. The instructions below only are accurate for previous years' tax rates. For the 2011 and 2012 tax years, please consult the IRS or a tax professional.

If you have a nanny or frequent babysitter for your child, you need to understand the nanny tax. The IRS requires anyone with household help, such as a babysitter or housekeeper, to pay Social Security and Medicare taxes if annual pay crosses a set threshold, which was $1,600 for 2008 and $1,700 for 2009, 2010 and 2011.

So if you pay the same adult babysitter $35 every Saturday night, you must pay the nanny tax. Not only is it illegal to skip the nanny tax, it's unfair to the person who's caring for your child. You're potentially costing her or him future Social Security and Medicare benefits by failing to honor the nanny tax.

Difficulty: Average
Time Required: 3 to 5 hours to fill out Forms W-2 and W-3

Here's How:

  1. When you hire a babysitter or other household employee, make sure that person can legally work in the United States by examining their documentation and filling out Form I-9. You can get the I-9 Form online or by calling 1-800-870-3676.

  2. Agree with your nanny about whether you, the employer, will withhold federal income tax. You are not required to do so, but any change to the agreement must be in writing. (Federal tax withholding is not covered by this article.)

  3. Check with your state about whether you will owe state employment taxes. (State employment taxes are not covered by this article.) The relevant state agencies are listed in an appendix to IRS Publication 926.

  4. Decide whether you are going to pay your nanny's share of Social Security and Medicare taxes, or deduct it from her pay. Explain the decision to your nanny. If you agreed on an hourly rate of pay without discussing the nanny tax, and deduct employment taxes, she might be surprised to find a lower amount in her paycheck that she expects.

    Medicare and Social Security taxes amount to 15.3 percent of her pay. Half of that is the employee's share, which you withhold from each paycheck (or pay yourself, if that's how you decide to handle it). You, the employer, send both halves of the tax to the federal government.

  5. Decide how you will pay the nanny tax. One choice is to ask your own employer (or your spouse's employer) to withhold more from your wages in order to cover household employment taxes. Or, you can make estimated tax payments to the IRS each quarter. Another option is to pay the nanny tax on April 15 with your income tax, but if the amount is large enough you might be subject to penalties.

  6. Keep records of all payments to your household employees, whether cash or check.

  7. At the end of the calendar year, add up all the money you've paid your nanny.

  8. Before February, contact the IRS to be assigned an employer identification number. You can call 800-829-4933, apply online, apply by fax or apply via mail.

  9. By the beginning of February, you must fill out Form W-2 and give copies to your employee. Steps 10 to 13 guide you through the minimum required information for Forms W-2 and W-3.

  10. On Form W-2, put the employee's Social Security Number in box a. Put your employer identification number in box b. Put your name and address in box c. Put your employee's name and address in box e.

  11. On Form W-2, write the total wages you paid boxes 3 and 5. (For the purposes of this example, I assume that you decided to pay your nanny's share of the taxes rather than withhold from her paycheck.) Multiply the total wages by 6.2 percent and write the answer in box 4. This is the employee's share of Social Security tax. If you also withheld federal income tax, it should go in box 2.

  12. Now, multiply the total wages (box 3) by 1.45 percent and write the answer in box 6. This is the employee's share of Medicare taxes. Add together the figures in boxes 2, 3, 4 and 6 and put the total in box 1.

    If you're worried about your math, the instructions for Schedule H contain a useful example with the boxes filled in.

    Copy the information onto the duplicate copies of Form W-2. Congratulations! You're ready to give Form W-2 to your nanny. (Keep Copy A for yourself.)

  13. On Form W-3, copy the numbered boxes from Form W-2 into the corresponding boxes. (Thank you, IRS, for making the numbers the same!) Fill in your name, address, phone number and employer identification number. Check the box that says "Hshld.emp." to indicate that you're a household employer. Sign and date the form.

  14. Before March, send Form W-3 and Copy A of Form W-2 to the Social Security Administration.

  15. By April 15, file Schedule H with your federal income tax return (Form 1040). The figures on Schedule H for Medicare and Social Security taxes should be double the figures on the W2, because you're paying the employee's share plus the employer's share.

Tips:

  1. These instructions only apply to Social Security and Medicare taxes. Read IRS Publication 926 to see if you owe federal unemployment tax as well. Check with your state to see if you owe state employment taxes.

  2. For exceptions to the nanny tax (such as when you pay your child for babysitting a sibling) and a complete list of who qualifies as a household employee, read IRS Publication 926.

  3. Keep copies of all your records. Place your completed Forms W-2 and W-3 near the top of the file so you can easily copy the information that stays the same from year to year.

  4. Some families put aside 15.3 percent of every paycheck they give their sitter in order to have enough to pay Medicare and Social Security taxes when they're due.

  5. Make sure you use the official IRS Forms W-2 and W-3, which are scannable. If you submit copies you printed from the Internet you may be subject to a penalty.

What You Need

  • IRS Publication 926
  • Official IRS Forms W2 and W3. Call 800-TAX-FORM to order them.
  • Record of wages paid for the year
  • Your nanny's Social Security number and address
  • Your household employer identification number
  • A calculator
  • Scratch paper and a pen
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