Employee or Independent Contractor?
From Tax Guide.
Tax Guide · Arab, Alabama
Household Employer and Nanny Taxes: Do You Owe Them?
If you pay a nanny, caregiver or housekeeper, you may be a household employer with payroll taxes to handle. Learn how Schedule H works.
The short answer
What is the nanny tax and who owes it?
The "nanny tax" is the set of employment taxes a household employer may owe when they pay someone to work in or around their home, and it is reported on Schedule H with the household employer's own Form 1040.
The name is a little misleading. It is not a special tax on nannies. It is the ordinary Social Security and Medicare tax and, in some cases, federal unemployment tax, applied to the wages of a household worker.
You may owe it if you pay someone to do work in your home and you control what work is done and how. Whether you owe anything depends on how much you pay the worker over the year, and the IRS sets that limit, so we confirm the current rules.
Who counts
Which household workers are employees?
A worker is usually a household employee when you decide what the person does and how they do it, even if the job is part time.
The general test is the same as the one described in our guide to employee or independent contractor. Someone who runs their own business, brings their own tools and serves several clients, such as a lawn service or an outside cleaning company, is generally not your employee.
A worker you direct, at your schedule and in your home, generally is. Examples that often fit include nannies, in-home caregivers, housekeepers and private cooks. Paying in cash or calling the worker a contractor does not change the picture. Some special rules exist too, such as for certain family members and for young workers, so check before assuming.
- Nannies and babysitters who work in your home on a regular basis.
- Home health aides and caregivers you direct.
- Housekeepers, private cooks and gardeners who work under your direction.
What is owed
What taxes does a household employer pay?
A household employer may owe Social Security and Medicare taxes, may need to withhold from the worker's pay if agreed, and may owe federal unemployment tax.
Household employers generally withhold the employee's share of Social Security and Medicare from wages and add the employer's matching share. Withholding income tax is optional and happens only when the employee asks for it and the employer agrees, usually with a Form W-4.
The employer reports these taxes on Schedule H, filed with their personal income tax return. Many household employers cover the payment by adjusting their own withholding or estimated payments during the year, which is worth planning for. Our guide to estimated quarterly taxes explains how those installments work.
Your to-do list
What paperwork does a household employer need?
A household employer usually needs an employer identification number, a completed Form I-9, a Form W-4 if withholding, and a W-2 for the worker at year end.
This is a general list. It reflects the same basic steps as in hiring your first employee, adapted for a home.
- Apply for an employer identification number, since a Social Security number is not used as the employer number on these filings.
- Have the worker complete Form I-9 to show they may work in the United States, and keep it on file.
- Collect a Form W-4 if you will withhold income tax.
- Keep a record of hours and pay for each pay period.
- Give the worker a Form W-2 after year end, and file the W-2 copies as required. See W-2 and W-4 forms for employers.
- Report the taxes on Schedule H with your Form 1040.
Watch out
What happens if I have been paying a nanny or caregiver off the books?
Unreported household wages can lead to back taxes, penalties and interest, and they can cause problems for the worker too.
Paying household help without reporting is more common than people think, and it is often done with no bad intent. Still, the worker may miss out on Social Security credit, and unemployment or other benefits, if wages are never reported.
If you realize you should have been reporting, the fix begins with facts: who worked, when, and what you paid. Do not ignore a letter from the IRS about it. Keep a copy and call the office, and our tax representation service can review the notice and respond on your behalf. Alabama has its own rules, and we check how they apply.
How we can help
How Melton Tax Services can help household employers
Our payroll and bookkeeping service can help you set up payroll and records for a household worker.
We can help with running payroll and organizing the records, so year-end forms and your Schedule H are ready. See our payroll and bookkeeping page.
To talk about your situation, contact us or call 256-586-4635. We serve Arab and the surrounding area. Please do not send Social Security numbers or documents through this website. Bring them by the office or call us.
Answers
Questions about nanny and household taxes
Do I owe the nanny tax if I pay my babysitter occasionally?
It depends on how much you pay the worker over the year and on the IRS limit that applies. Occasional help may fall below the limit, but the IRS sets it each year, so check before assuming.
Is a nanny an employee or an independent contractor?
A nanny you direct in your home is generally an employee. Being paid by check or cash, or signing an agreement that says "contractor," does not change that on its own.
Do I have to withhold income tax from a household employee?
Not necessarily. Income tax withholding is optional for household employers and happens when the employee asks and the employer agrees. Social Security and Medicare taxes are handled separately.
Where do I report the nanny tax?
Household employers report it on Schedule H, filed with their Form 1040. The worker gets a W-2, and the employer sends the W-2 copies to the Social Security Administration.
Can I pay a family member and skip these taxes?
Sometimes, but not always. The rules for a spouse, a child or a parent working for you are different, and they depend on the relationship and the age of the worker. Ask us before assuming.
Does a household employer also owe unemployment tax?
Possibly. Federal unemployment tax may apply depending on how much you pay in wages, and the IRS sets the threshold. Alabama has its own rules, and we check how they apply.
Read next
Related reading
W-2 and W-4 Forms for Employers
From Tax Guide.
Payroll Taxes Explained: FICA, Withholding and More
From Tax Guide.
Hiring Your First Employee: Tax and Paperwork Guide
From Tax Guide.
Payroll and Bookkeeping
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.