Will you pay a nanny working in your home more than $1,600 in 2008? Unless that nanny is your parent, spouse, under-age-21 child or someone under 18 whose principal occupation is not household employment (a student, for example), then you will owe the tax. The nanny tax is short for three federal employment taxes - Social Security and Medicare taxes (FICA tax) and the Federal Unemployment, or FUTA, tax. You will probably also owe state unemployment tax and state disability tax as well. Contact the appropriate state agency (IRS Publication 926) and find out what’s required.

The IRS will charge an interest penalty if your taxes turn out to be underpaid because you didn’t take the nanny tax liability into consideration. You can avoid the penalty by paying your nanny tax as you go, via extra withholding from your salary or by making bigger quarterly estimated payments.

How to Get IRS Forms

Free copies of Form SS-4, Form W-2, Form W-3, and Schedule H  are available by by calling 1.800.TAX-FORM.  You can also download directly  from the website at  www.irs.gov.   IRS Publication 926 (Household Employer’s Tax Guide) may be helpful as well.

Employer ID Number and Form W-2 are
Usually Required

If you owe any FICA or FUTA taxes (or if any federal income tax was withheld from the nanny’s wages), you need an employer ID number (EIN). Get one ASAP by filing Form SS-4. You must then give your nanny a Form W-2 and file a copy with the government (along with Form W-3)

Any FICA and FUTA taxes on the nanny’s wages are simply treated as part of your personal tax liability for the year. They are calculated and reported using Schedule H (Household Employment Taxes). The tax amounts are transferred from Schedule H to the appropriate line on page two of your 1040 and the completed Schedule H is then filed with the return.

The FICA Tax

FICA tax totals 15.3% of wages. Technically, the employer (you) and the employee (the nanny) each owe an amount equal to 7.65% of the wages, for a combined tax of 15.3%. You can withhold the nanny’s half from the paychecks Most simply pay the nanny a cash wage without any withholdings. If you choose this route, you must pay the entire 15.3%.

The FUTA Tax

FUTA is due on the first $7,000 of the nanny’s wages for the year - but only if you paid $1,000 or more in any calendar quarter for the current year or preceding year.

Federal Income Tax Withholding

Federal income tax withholding is required only if you and the nanny agree to do it and the nanny gives you a Form W-4.

Overtime Pay

Federal labor law states, household employees are entitled to overtime pay. Overtime pay must be 1.5 times the hourly rate for hours worked over 40 in a seven day work week. For a salaried nanny overtime should be addressed in the family agreement. There is no limit on the number of hours worked in a work week, as long as the nanny is fairly compensated.