Navigating the ‘Nanny Tax’ in the times of COVID

The ongoing COVID-19 pandemic has changed the way many families live and how they school their children. Given the current environment, many families have found themselves in need of childcare to allow them to work or to assist in homeschooling their children.

In today’s world, this type of help is an absolute necessity for some, but many people have not thought through what it means for tax purposes. Don’t forget that if you employ any household employees, you ultimately are responsible for what is called the “Nanny Tax."

Depending on the amount of wages paid, you may be required to withhold taxes for Social Security and Medicare (FICA), and be sure to do that from the start if you expect to meet the annual threshold of $2,200 for FICA. Doing so will protect your nanny and other household workers from getting hit with a large, unexpected withholding in their paychecks later on.

And remember that you also have an obligation to pay federal unemployment tax (FUTA) if you pay them a total of $1,000 or more in wages in any quarter of the current or previous calendar year. FUTA is paid only by the employer, so be sure to not withhold it from the nanny's wages.

Don’t forget to provide a W-2 to any of your household employees. If the nanny's yearly wages are subject to FICA or income tax withholding, the W-2 is due by Jan. 31 of the following calendar year. It’s important to include your employer identification number (EIN) when you report the employment taxes for your nanny.

As an employer, you also must satisfy your "Nanny Tax" obligations by either increasing your quarterly estimated tax payments or increasing the withholding from your wages in order to avoid a potential underpayment penalty. However, employment tax returns are not required, as you can just report the employment taxes on your personal tax return.

This is a lot to keep tabs on, particularly on top of everything else people are dealing with during the pandemic. At PADGETT BUSINESS SERVICES, we have a network of trusted small business advisors and tax professionals that can help you understand the ins and outs of how to manage the “Nanny Tax” to set you up for success.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.