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Although it is often called the “nanny tax”, this tax does not only apply to parents of children for whom a babysitter is hired. According to the IRS, the “nanny tax” applies to anybody who pays $2,000 or more in a calendar year (amount as of 2017) to any one household employee. Household employees include housekeepers, nannies, gardeners, pet sitters, senior care aides, drivers, tutors, etc...anybody who fits the description of an employee versus an independent contractor.
The main key in determining if you're required to pay the “nanny tax” is whether you've hired an employee, or an independent contractor.
Employee vs. Independent Contractor
Workers are generally considered employees if they meet specific job descriptions and duties. It doesn't matter what tasks the employee does, if they're part-time or full-time, or how you found them. If they meet the $2,000 figure and you control what work they do...and provide instructions on when to do it...you're they're employer.
For example, if you have a gardener who brings all his own equipment, comes at his own timing, and owns his own business - he's not your employee; he's an independent contractor. You're off the hook! But if this same person comes to your house at specific times you request, uses your tools and completes the job per your specifications, then you have a household employee.
More examples of Employees (only if pay exceeds the annual limit mentioned above):
More examples of Independent Contractors:
There are many examples of different types of people you may hire for different jobs. If you're unclear on whether these folks are employees or independent contractors, feel free to contact us. We’re here to help!
Anybody who fits the description of being a household employer is required to ensure employment taxes are paid. This means withholding for FICA (social security and Medicare).
Generally the employer pays 1/2 of the 6.2% social security and 1.45% Medicare tax, and the employee pays an equal 6.2% social security and 1.45% Medicare tax. So a total of 15.3% must be withheld.
For most people, this often brings upon the need for a payroll company to handle these withholdings, which means more expenses.
To pile on even more, federal and state unemployment insurance may be a requirement as well. So the costs can add up quickly.