What are my tax responsibilities with a temporary nanny? She only worked for us for six weeks while my wife was on bed rest.
Many families hire temporary household workers and have many questions about their financial and legal responsibilities. Examples include the temporary nanny who is working while the mother is on bed rest, the respite senior caregiver staying with an aged family member while you are away for work or vacation, or the summer nanny who only works while your children are on summer vacation.
Employee or Independent Contractor?
The distinction between employees and independent contractors can be confusing. The distinction is important because employers of household employees are obligated to obey labor laws and to file and pay employment taxes. The IRS maintains that household service workers such as nannies, senior caregivers, and housekeepers that you hire and pay directly are your employees. Consequently, you become an employer.
HWS publishes a free Employee v. Independent Contractor Decision Tool to guide you. Simply answer a few questions about your relationship with the worker and the tool will help you understand the important distinctions.
What are my responsibilities as an employer?
Whether you hire a household worker for one hour or full time, you are an employer subject to all labor laws and regulations. Your tax payment and reporting obligations, however, hinge on how much you pay to the temporary employee. You will have tax obligations if:
- You pay the temporary employee $2000 or more in the year (2016), or
- You pay all of your employees $1000 or more in a calendar quarter.
If you meet either of these criteria, you may be required to file and remit taxes to include Social Security, Medicare, and federal and state unemployment. If you pay your temporary employee $2000 or more in the year you are also obligated to provide her a W-2 form at the end of the year.
Your household employment tax obligations may include:
- Social Security & Medicare Taxes
- State Unemployment Taxes where required
- Federal Unemployment Tax (FUTA) where required
The employer is solely responsible for the remittance of the Social Security and Medicare taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer.
» HISTORICAL HOUSEHOLD EMPLOYMENT WAGE TEST VALUES
A family will often hire a temporary nanny or caregiver who may work for just several weeks. Legally, she is your employee the first day she starts with you, and labor law protections such as overtime and minimum wage apply. Your tax responsibilities with a temporary nanny or caregiver for the Social Security and Medicare taxes, however, will only kick in if you pay this individual the annual threshold amount ($1900 in 2015). Your tax responsibilities, therefore, are not a factor of whether she is an employee or not, but rather how much you pay her.
TIP: Never make any payment to a nanny or other caregiver, temporary or permanent, without first obtaining the caregiver’s full legal name, Social Security Number, and permanent mailing address.
Be advised that unemployment tax liability wage thresholds are lower – between $500 and $1000 depending on the state. So it is possible to have a temporary nanny for whom you do not have to pay the Social Security and Medicare taxes, but do have unemployment tax liability. These situations should be thoroughly discussed with your nanny tax preparer.
The IRS requires that you provide your temporary nanny to whom you paid between $600 and the annual liability threshold with a Form 1099 MISC and file the appropriate copies with the IRS (careful how you complete, these wages are not subject to SS/Medicare taxation or to self-employment tax). You may voluntarily provide and file a Form 1099 MISC to any nanny you pay any amount. This is a general employer obligation – not specific to household employment.
If you wish to avoid this obligation, we recommend that you engage a temporary nanny who is paid by the referring agency. This is a bit more expensive, but can save you all the tax headaches. When you hire through the agency, you make your payments, for example, to 123 Nanny Agency Inc. – and not to Mary Jones.