A. Yes. You will need to withhold Social Security and Medicare taxes, known together as FICA taxes. Both you and your nanny likely owe FICA taxes. Your share, as the employer, is 7.65% (6.2% for Social Security and 1.45% for Medicare) of the employee’s Social Security and Medicare wages, and your nanny owes 5.65% (4.2% for Social Security and 1.45% for Medicare) — for a grand total of 13.3%. A number of questions and issues arise from this requirement. Let’s take them one at a time:
What qualifies for “Social Security and Medicare Wages”? If you paid your employee cash wages of greater than $1,700 in 2010, all of those wages qualify as Social Security and Medicare Wages. As you can imagine, the $1,700 threshold number changes from year-to-year so it is very important to check the IRS website for any updates before deciding whether your nanny’s wage qualifies as Social Security and Medicare wages.
What are “cash wages”? Cash wages include wages you pay by cash, check, money order etc. Cash wages DO NOT include food, lodging, clothing or other non-cash items that you give to your nanny in the course of his/her employment. Please note that this definition applies to FICA taxes only, not income taxes, unemployment taxes etc.
Wages that DO NOT qualify for the withholding obligation: Notably, there are certain cash wages that do not qualify for Social Security and Medicare Wages. Wages you pay your spouse; your child who is under the age of 21; your parents with some exceptions (please see IRS guide book); and, an employee who is under the age of 18 who’s primary income is not providing household services such as nanny care (if the minor is a student, nanny services is not considered his or her principle occupation). There is also an exclusion for wages over $106,800 (for more information visit the IRS guide book).
Your withholding responsibility as the employer: As an employer you have one of two options with regard to FICA taxes:
Option 1: you pay 7.65% out of pocket, and you can choose not to withhold your employee’s share of FICA taxes; instead, you, as the employer, pay the entire 13.3% out of pocket (your share of 7.56% plus your nanny’s share of 5.65% equaling 13.3%). For example, if a nanny’s wages are $10 per hour, the nanny’s share of FICA taxes is $0.565 (5.65% x $10 = 0.565) on one hour of work, and the family’s share as employer is $0.765 (7.65% x $10 = 0.765). Thus, the total FICA taxes paid by the family for one hour of the nanny’s work is $1.33.
Option 2: You pay your 7.65% of the nanny’s Social Security and Medicare wages out of pocket (same as above), and you withhold your nanny’s share of 5.65% from his/her wages. Using the example from above, your nanny would be paid $9.44 per hour of work ($10 – 0.565 = 9.44), and the parents would still be obligated to pay the $1.33 to the IRS (0.565 withheld from the $10 per hour + 0.765 owed by the parents = 1.33).
NOTE: If you choose to pay both shares out of pocket (i.e., you don’t withhold your employees share of 5.65% from his/her paycheck, you pay it out of pocket) your employee’s wage FOR INCOME TAX PURPOSES changes– it increases by 5.65%.
For further information please visit the IRS’s Household Employer’s Tax Guide by clicking here. Included in that guide are examples and explanation of how to complete W-2 and W-3 forms. If you continue to have trouble, please consult with an accountant or tax attorney.