How to Do Your Nanny Taxes the Right Way

Marin Mommies presents a sponsored article from GTM Payroll Services, who are experts in handling all your household employer payroll and taxes.

Congratulations—you found the perfect nanny for your family!

This also makes you a household employer, which means you need to follow the rules around domestic employment. A big piece of this is figuring out nanny taxes and payroll. It can be time-consuming and confusing and carries some risk of fines and penalties if you don’t get it right.

First, nanny taxes apply if you’re paying your employee $2,100 or more in a calendar year. Even if you hire a summer nanny or someone for afterschool care, you’ll reach this threshold rather quickly.

Here are the steps you need to take:

1. Obtain your household employer tax ID from the Internal Revenue Service and register as an employer with California’s Employment Development Department (EDD).
2. File a new hire report with the EDD.
3. Obtain workers’ compensation insurance (required by state law). In California, you may be able to add coverage to your homeowner’s or renter’s insurance policy. Check with your provider if this is an option for you. If not, you'll need to purchase a separate policy.
4. Verify your nanny’s social security or tax identification number and complete Form I-9 for employment eligibility. Keep Form I-9 on file along with copies of the documents provided for eligibility verification.
5. Calculate your nanny’s tax withholdings. You must withhold 7.65 percent of their wages for Social Security and Medicare (FICA) taxes. You’ll also contribute this amount as an employer for a total of 15.3 percent being remitted for FICA taxes. Withholding income tax from your employee’s pay is optional. If you and your nanny decide to withhold, you would do so based on their W-4 form.
6. Adhere to all applicable tax, wage, and labor laws that pertain to household employment such as California’s Domestic Workers’ Bill of Rights. Nannies must also be paid at least the highest minimum wage of federal, state, and local rates. They are also entitled to time-and-half overtime pay.
7. Prepare and distribute paystubs even if you’re paying by direct deposit or other electronic methods like PayPal or Venmo. You are required to give your nanny an itemized written statement every pay period, which must include information like total gross wages, total hours worked, deductions, and more.
8. File and remit federal taxes quarterly using Form 1040-ES as well as state taxes.
9. Read and respond to government notices and alerts.
10. Monitor changes to tax, wage, and labor laws that could affect domestic employment such as an increase in minimum wage, changes in paid leave requirements or other rights and protections afforded to household workers.
11. Prepare and distribute Form W-2 to your employees by January 31 for the previous year’s wages and taxes.
12. File Copy A of Form W-2 and Form W-3 with the Social Security Administration by January 31.
13. Prepare Schedule H and file with your federal income tax form.

The IRS estimates that it takes a household employer 60 hours each year to comply with federal and state tax laws.

If you have better use of your time, GTM Payroll Services can handle the administrative tasks associated with household payroll and taxes. We offer a free, no-obligation consultation to review your specific situation. Call (800) 929-9213 or visit GTM.com/household/MarinMommies and we’ll show how we remove the hassles, worries, and risks of household payroll to give you peace of mind (plus more time in life for the things you enjoy).