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COMPLYING WITH THE NANNY TAX RULES
Do you have a household employee that you're paying above board? If so, are you complying with the Nanny Tax rules? Currently, as many as five different taxes may apply to household employees:
Applying for an Employer Identification Number
For starters, household employers need to have an employer identification number (EIN) assigned to them by the IRS. Social security numbers will not be accepted by any of the government agencies. Household employers are required to report their employer identification number on the Schedule H as well as on any Form W-2’s issued to their employees.
Social security and Medicare taxes
Cash wages paid to a household employee are only subject to social security (FICA) and Medicare taxes if total cash wages paid to that employee during any calendar year exceed $1,600 (in 2008). Employees under the age of 18 whose principal occupation is not that of a household employee are not subject to these taxes.
For those household employees who earned more than $1,600 during the calendar year, social security taxes should be withheld from their compensation at a rate of 6.2% and Medicare taxes should be withheld at a rate of 1.45%. The household employer is required to match any social security and Medicare taxes withheld. The value of food, lodging, clothing, and other non-cash items provided to the employee is not subject to social security or Medicare taxes.
Household employers have the option of paying the employee's portion of the social security and Medicare taxes instead of withholding those taxes from the employee's wages. In that case, the employee's federal and state taxable wages will be increased by the amount of taxes paid on their behalf.
Federal Unemployment Taxes
Federal unemployment taxes (FUTA) will be due for household employees if, during any calendar quarter of the current or prior year, total cash wages paid to all employees exceed $1,000. The effective rate of this tax is 0.8% and will generally be limited to the first $7,000 earned during the year by each employee. However, if the state unemployment taxes are not paid in a timely manner, the FUTA rate increases to 6.2%.
Federal Income Taxes Withheld
Some household employees will request that federal taxes be withheld from each paycheck and submitted to the government. Tables contained in the "Circular E" (available at www.irs.gov) determine the rate at which federal income taxes should be withheld for these employees. Each year, the IRS provides employers with a Circular E.
State Unemployment Taxes
In most states, a household employer is required to register with the state's Division of Unemployment Assistance and remit taxes to that agency on a quarterly basis if total cash wages paid to all employees exceed $1,000 in any calendar quarter of the current or previous year. Household employers need to comply with their state's rules. Failure to make timely payments of the quarterly unemployment taxes due will result in the federal unemployment tax rate increasing from 0.8% to 6.2%.
State Income Taxes Withheld
Some household employees may request that state income taxes be withheld from each paycheck and submitted to the government. The department of revenue of your state will be able to provide information regarding the proper method of submitting any amounts withheld.
Reporting Taxes Due
Individuals who employ household employees need to complete and attach a Schedule H to their Form 1040 reflecting any social security and Medicare taxes, federal unemployment taxes, and federal income taxes withheld or otherwise due.
Any state unemployment taxes or state income taxes withheld or otherwise due will need to be reported to the proper government agency in accordance with their specific guidelines. Most states have web-based reporting and payment options available.
Submitting Taxes Due
Any social security and Medicare taxes, federal unemployment taxes, or federal income taxes withheld or otherwise due should be submitted once a year in connection with filing the personal income tax return (Form 1040). Those individuals who employ household employees should either have additional federal income taxes withheld from their salaries or make quarterly estimated tax payments.
Any state unemployment taxes or state income taxes withheld or otherwise due will need to be submitted to the proper government agency in accordance with the agency’s specific guidelines.
All household employers are required to issue a completed Form W-2 to their employees prior to January 31st. The W-2 should reflect the employee's gross taxable earnings as well as the taxes withheld. Copies of the W-2's must be submitted to the Social Security Administration prior to February 28th along with a Form W-3.
Worker’s Compensation Insurance
Very important!! Most homeowner’s insurance will only protect household employers up to a certain limit. Individuals who employ household employees, therefore, may be required to purchase an additional type of insurance known as worker’s compensation insurance. Prior to hiring any household employees, individuals should always remember to notify their insurance agents. And if you’re a renter, maintaining renter’s insurance is a must if you have a domestic employee.
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