Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Nanny Tax

What it is:

A nanny tax is a colloquial term for the Social Security, Medicare and federal unemployment taxes due on the pay to caregivers.

How it works (Example):

For example, let's say John and Jane Doe hire Sally Smith to take care of their two preschool-age children while they are at work. Over the course of the year, they pay Sally Smith $15,000.

The IRS deems Sally a household employee, and therefore John and Jane Doe must pay payroll taxes on Sally's $15,000 of income. These payroll taxes are called the nanny tax.

Each year, the IRS announces the minimum income on which nanny tax applies. In most cases, if John and Jane have their 17-year-old son or other family member watch the kids, the tax also does not apply.

Why it Matters:

Nanny tax liabilities can come as a surprise to many working parents, and they should take the time to educate themselves about their responsibilities when hiring domestic help. Typically, the nanny tax is tacked on to a taxpayer's tax liability when filing income tax, though failure to pay the nanny tax on a timely basis can trigger interest and penalties from the IRS. Also, states have their own conditions and requirements regarding the nanny tax.

It is important to note that the nanny tax can apply to any domestic help: gardeners, housekeepers and other people who are employed in your home (regardless of whether they are caring for your children).