Legal Definitions - nanny tax

The nanny tax is a colloquial term referring to the federal (and sometimes state) employment taxes that individuals must pay when they employ household workers. These taxes typically include Social Security, Medicare, and federal unemployment taxes (FUTA), which are owed by the employer when a household employee's wages exceed a certain annual threshold. While commonly associated with nannies, this obligation applies to various domestic workers such as housekeepers, caregivers, and personal assistants who are considered employees rather than independent contractors.

Here are some examples illustrating the nanny tax:

• Full-Time Childcare Provider: The Rodriguez family hires a full-time nanny to care for their two young children while both parents work. They pay her a weekly salary that, over the course of the year, significantly exceeds the Internal Revenue Service's (IRS) annual wage threshold for household employees. Because the nanny is considered an employee and her earnings are above the threshold, the Rodriguez family is responsible for paying the nanny tax. This involves withholding Social Security and Medicare taxes from her wages, paying their own employer share of these taxes, and also paying federal unemployment tax (FUTA).

• Live-In Senior Caregiver: An elderly individual, Mr. Henderson, requires daily assistance due to a medical condition and hires a live-in caregiver. The caregiver's annual compensation, which includes her wages and the fair market value of her room and board, surpasses the IRS threshold for household employees. As the employer, Mr. Henderson must comply with nanny tax obligations. This means he is responsible for ensuring proper payroll deductions for the caregiver's share of Social Security and Medicare taxes, and for paying his own employer portion of these taxes, as well as FUTA.

• Part-Time Housekeeper and Personal Assistant: Ms. Chen, a busy professional, employs a part-time individual who performs both housekeeping duties and acts as a personal assistant, managing errands and appointments. Although this individual only works three days a week, her hourly rate and consistent schedule mean her annual earnings exceed the specified IRS threshold for household employees. Consequently, Ms. Chen is obligated to pay the nanny tax, managing the required employment tax contributions for Social Security, Medicare, and FUTA, just as a business employer would for their staff.