Parents Guide to Nanny Taxes

How to Pay Nannies Legally

To hire a nanny without a diligent background check puts a family, their house, and children at risk. To hire a nanny without doing a diligent search of applicable tax rules and hiring regulations puts the parents' reputation and finances at risk.

The Internal Revenue Service (IRS) defines a nanny as an employee. Click here to see the definition. It does not matter if the employee is hired full-time, part-time, or for seasonal work. It also does not matter whether the nanny is paid on an hourly, daily, weekly, bi-monthly basis, or by the job. Tax law does not distinguish whether the nanny is hired through an agency or any other source.

Parents must file certain forms to report their nanny’s wages and the federal employment taxes for the employee if they pay any of the following wages to the employee.

1. Social security and Medicare wages.
2. Federal Unemployment Tax (FUTA) wages.
3. Wages from which you withhold federal income tax.

The employment tax forms and instructions they need for 2012 should have been sent automatically by January 31, 2012. For information on ordering forms contact the Taxpayer Advocate at: 1-877-777-4778 or visit www.irs.gov/advocate.

√ Employment Identification Number (EIN).
Parents must include an employer identification number (EIN) on the forms they file for their nanny. An EIN is a 9-digit number issued by the IRS. It is not the same as a social security number.

√ If parents do not have an EIN, they should get Form SS-4, Application for Employer Identification Number.
The instructions for Form SS-4 explain how you can get an EIN immediately by telephone or in about four weeks by mail. In addition, the IRS is now accepting applications through its web site at www.irs.gov/businesses/small.

√ Form W-2. File a separate 2012 Form W-2, Wage and Tax Statement, for each household employee.
Visit the SSA’s Employer Reporting and Information web site at www.socialsecurity.gov/ for guidelines to file electronically. If the nanny stops working before the end of a tax yeat, parents can file Form W-2 and provide copies to the nanny immediately after they make the final payment of wages.

√ Schedule H.
Parents use a Schedule H to report nanny taxes if the employers pay any of the following wages to the employee.

1. Cash wages of $1,800 or more.
2. Federal Unemployment Tax (FUTA) wages.
3. Wages from which they withhold federal income tax.

Parents should file Schedule H with their 2012 federal income tax return by April 15, 2013. If they get an extension to file their return, the extension also will apply to the Schedule H.