A client of mine recently had a baby. Yay, Baby!! With that bundle of joy comes additional tax responsibilities and implications… and sometimes credits and deductions.
She had two questions. What is the nanny tax? And Is it simple to do it yourself or should you pay a professional payroll company? (Ultimately, my client decided to try it out herself before she hires a payroll service. As with any business there are initial startup costs and then monthly bookkeeping and filings. Sometimes certain forms can be filed on a quarterly or annual basis. Record keeping and organization is imperative for “keeping the books” long term.)
Many years ago, nanny’s and day care providers were simply considered self employed and filed their income and expenses on the Schedule C (attached to the 1040). The family would pay cash or check and the nanny or sitter would account for it on their own returns. However, now, the tax law states that if nanny’s are paid more than $2,000 a year they are considered employees and are subject to all of the regular employment taxes, unemployment insurance and workman’s comp. Thus creating additional paperwork and costs.
What is the nanny tax? And is it easy to DIY
This weird sounding tax is actually just basic employment and payroll taxes. All employees and/or employers are required to pay social security taxes, Medicare taxes, and sometimes unemployment insurance. The “employers” may or may not withhold and pay federal /state too. You’ll save quite a bit of money doing it yourself and its not that difficult. Although, it is work in a sense and it takes a bit of time.
- Be able to read and follow directions. Have some patience.
- Be organized: calculate hours worked, gross income and net income.
- Be tech savvy. Most of this stuff can be done online. It’s also handy to have a scanner/copier/ printer handy but it’s not required necessarily.
- Be able to follow due dates and pay on time (or you’ll be subject to fees and penalties). Ex: for unemployment insurance, you usually calculate January thru March and the money is due in April.
Go to irs.gov and search for form SS-4 (fss4), Employers federal ID number. Fill it in and apply online, or download the pdf to a computer and fill it out by hand then mail it in. Im sure the agencies hate it, but I still do alot by hand and use my stamps.com account to mail it in.
Go to Colorado.gov/revenueonline and apply for a state wage withholding license (only if withholding state tax for your employee).
IRS’s publication 926 instructs household employers of their duties. I’m going to use a combination of that publication and my own insight and experience to describe the process to do your own bookkeeping and payroll when you have certain employees.
The Numbers for Social Security and Medicare tax Employer W-2 Filing Instructions & Information
The social security tax rate is 6.2% each for the employee and employer, unchanged from 2016. The social security wage base limit is $127,200. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2016. There is no wage base limit for Medicare tax. Social security and Medicare taxes apply to the wages of household employees you pay $2,000 or more in cash in 2017.
The process *not including responsibilities for withholding federal and state taxes for the employee*
Example. On February 13, 2017, Mary Brown hired Jane A. Oak (who is an unrelated individual over age 18) to care for her child and agreed to pay cash wages of $50 every Friday. Jane worked for the remainder of the year (a total of 46 weeks). Jane didn’t give Mary a Form W-4 to request income tax withholding. The following is the information Mary will need to complete Schedule H, Form W-2, and Form W-3. See the completed examples of Form W-2 and Form W-3 for 2017 at the end of this publication
Total cash wages paid to Jane $2,300.00
($50 x 46 weeks)
Jane’s share of: Social security tax is $142.60 EE share
($2,300 x 6.2% (0.062))
Medicare tax is $33.35 EE share
($2,300 x 1.45% (0.0145))
Mary’s share of:Social security tax is $142.60 ER share
($2,300 x 6.2% (0.062))
Medicare tax $33.35 ER share
($2,300 x 1.45% (0.0145))
Amounts reported on Form W-2 and Form W-3:Annual reconciliation at tax time. Additionally, the schedule K will be added to the individual 1040 and reconciled that way. You may or may not be required to pay estimated quarterly tax payments to ensure you don’t owe more than $1000 at the end of the year. Talk to your tax professional.
Box 1: Wages, tips $2,300.00
Box 3: Social security wages $2,300.00
Box 4: Social security tax withheld $142.60
Box 5: Medicare wages and tips $2,300.00
Box 6: Medicare tax withheld is $33.35
The social security tax pays for old-age, survivors, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both you and your household employee may owe social security and Medicare taxes. Your share is 7.65% (6.2% for social security tax and 1.45% for Medicare tax) of the employee’s social security and Medicare wages. Your employee’s share is also 7.65% (6.2% for social security tax and 1.45% for Medicare tax).
Federal Unemployment (FUTA) Tax Pay Premiums / Report Wages
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Like most employers, you may owe both the federal unemployment tax (the FUTA tax) and a state unemployment tax. Or, you may owe only the FUTA tax or only the state unemployment tax. To find out whether you will owe state unemployment tax, contact your state’s unemployment tax agency.
Figure the FUTA tax on the FUTA wages you pay. If you pay cash wages to all of your household employees totaling $1,000 or more in any calendar quarter of 2016 or 2017, the first $7,000 of cash wages you pay to each household employee in 2017 is FUTA wages. You should also find out if you need to pay or collect other state employment taxes or carry workers’ compensation insurance. The FUTA tax is 6.0% of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. Your credit for 2017 is limited unless you pay all the required contributions for 2017 to your state unemployment fund by April 17, 2018. The credit you can take for any contributions for 2017 that you pay after April 17, 2018, is limited to 90% of the credit that would have been allowable if the contributions were paid by April 17, 2018. (If you didn’t pay all the required contributions for 2016 by April 18, 2017, see Credit for 2016,later.)
(A calendar quarter is January through March, April
through June, July through September, or October
through December.) If your employee’s cash wages reach
$7,000 during the year, don’t figure the FUTA tax on any
wages you pay that employee during the rest of the year.
Table 2. Household Employer’s Checklist
|You may need to do the following things when you have a household employee.|
|When you hire a household employee:||□ Find out if the person can legally work in the United States.
□ Find out if you need to withhold and pay federal taxes.
□ Find out if you need to withhold and pay state taxes.
|When you pay your household employee:||□ Withhold social security and Medicare taxes. (6.2% & 1.45%)
□ Withhold federal income tax.
□ Decide how you will make tax payments.
□ Keep records.
|By January 31, 2018:||□ Get an employer identification number (EIN). (Irs.gov)
□ Give your employee Copies B, C, and 2 of Form W-2, Wage and Tax Statement.
□ Send Copy A of Form W-2 with Form W-3 to the Social Security Administration (SSA). Don’t send Form W-2 to the SSA if you didn’t withhold federal income tax and the social security and Medicare wages were below $2,000 for 2017.
|By April 17, 2018:||□ File Schedule H (Form 1040), Household Employment Taxes, with your 2017 federal income tax return (Form 1040, 1040NR, 1040-SS, or 1041).
If you don’t have to file a return, file Schedule H by itself
Table 1. Do You Need To Pay Employment Taxes?
|IF you …||THEN you need to …|
|A–||Pay cash wages of $2,000 or more in 2017 to any one household employee.||Withhold and pay social security and Medicare taxes.
|Don’t count wages you pay to—
|B–||Pay total cash wages of $1,000 or more in any calendar quarter of 2016 or 2017 to household employees.||Pay federal unemployment tax.
|Don’t count wages you pay to—
|1 In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. You’re required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold.|
|Note. If neither A nor B above applies, you don’t need to pay any federal employment taxes. But you may still need to pay state employment taxes.|
Some people might enjoy using computerized components like excel to keep track of most of this but you can always do it by hand too. As long as you keep a running talle so that you can produce your numbers over various dates or quarters.
Shoot me an email if you have any questions. firstname.lastname@example.org