Social Security and Medicare Taxes
Under federal and state law, parents are not required to withhold money from their nanny’s wages for payment of federal and state income taxes. Nevertheless, some parents do so as a courtesy.
If parents do withhold taxes, the nanny should complete IRS Form W-4 and the equivalent state form (for states that have income taxes) for the calculation of the proper amount of money to be withheld. IRS Form W-4 can be downloaded at irs.gov, and the state form should be available at the website of the state taxing or revenue agency.
Social Security and Medicare taxes are known together as FICA taxes. Usually, parents and a nanny each owe FICA taxes. For 2011, a nanny’s share of FICA taxes is 5.65% of his or her wages, and parents have a matching employer share of 7.65%. Parents are responsible for paying the IRS both their own share as well as the nanny’s share. In doing so, parents have two options:
- Option 1: Parents pay both their own share as well as the nanny’s share of FICA taxes. Thus, parents will not withhold FICA taxes from the nanny’s wages and will pay the nanny’s share from parents’ own funds. 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) on one hour of work, and the parents’ share as the employer is $0.765 (7.65% X $10). Thus, the total FICA taxes on one hour of the nanny’s work is $1.33, which the parents will pay in its entirety from their own funds.
- Option 2: Parents withhold the nanny’s share of FICA taxes from the nanny’s wages and use the money withheld to make the required tax payments. Using the example above, the nanny will be paid $9.44 for an hour of work ($10 – $.565). Parents will still pay the IRS the required $1.33.
Unemployment, Workers’ Compensation
Parents are responsible for paying 100% of their nanny’s federal unemployment tax (known as FUTA) and any required state unemployment taxes and insurance. Parents may also be responsible for paying workers’ compensation insurance, which provides coverage for employees for injuries caused by or related to their employment. State law differ on these matters and may or man not apply to nannies.
For additional assistance, parents should contact their state department of labor and/or work with a nanny payroll company or employment attorney. Parents should also ensure that their nanny contract addresses the requirements.