Reporting nanny income accurately is essential for both employers and nannies. This guide, brought to you by income-partners.net, provides a clear roadmap to navigate the complexities of household employment taxes, ensuring compliance and fostering transparent financial practices. Discover how to handle employment taxes, W-2 forms, and more. Stay compliant with nanny tax laws and understand FICA taxes for nannies.
1. What is Considered Nanny Income and Why is Reporting It Important?
Nanny income encompasses all wages, salaries, and other forms of compensation paid to a nanny for their services. Reporting this income is crucial because it ensures compliance with federal and state tax laws, supports the nanny’s eligibility for Social Security and Medicare benefits, and allows the employer to potentially claim tax benefits like the Child and Dependent Care Tax Credit. Neglecting to report nanny income can lead to penalties, back taxes, and legal issues for both parties.
1.1. What Types of Payments Constitute Nanny Income?
Nanny income isn’t just the hourly or weekly wage you pay. It includes various forms of compensation that need to be accounted for when reporting taxes. Here’s a detailed breakdown:
- Wages and Salaries: This is the most common form of payment and includes the regular hourly or weekly rate you pay your nanny.
- Bonuses: Any additional payments made as a reward or incentive, such as a holiday bonus or performance-based bonus, count as income.
- Overtime Pay: If your nanny works more than 40 hours in a workweek, the additional pay for those hours is considered income. Overtime pay is typically calculated at 1.5 times the regular hourly rate, as mandated by the Fair Labor Standards Act (FLSA).
- Payment in Kind: If you provide your nanny with non-cash benefits like room and board, these are considered taxable income based on their fair market value.
- Reimbursements: While reimbursements for expenses directly related to their job (e.g., gas for errands, art supplies for activities with the children) are typically not considered income, it’s important to keep thorough records to differentiate these from taxable compensation.
1.2. Why is Accurate Reporting Critical for Employers and Nannies?
Accurate reporting of nanny income is vital for several reasons:
- Legal Compliance: Both employers and nannies are legally obligated to report income and pay the appropriate taxes. Failure to do so can result in penalties, fines, and legal repercussions.
- Social Security and Medicare Benefits: By reporting income and paying Social Security and Medicare taxes (FICA taxes), nannies contribute to their future benefits. This ensures they are eligible for retirement, disability, and healthcare benefits.
- Tax Credits and Deductions: Employers may be eligible for tax credits like the Child and Dependent Care Tax Credit, which can significantly reduce their tax burden. Nannies can deduct certain job-related expenses. Accurate reporting is necessary to claim these benefits.
- Avoiding Audits: Underreporting income or misclassifying a nanny as an independent contractor (when they are actually an employee) can raise red flags with the IRS and increase the risk of an audit.
- Building Trust: Honest and accurate reporting fosters a trustworthy relationship between employers and nannies, promoting a fair and transparent employment arrangement.
- State Unemployment Insurance: In most states, household employers are required to pay state unemployment insurance (SUI). This provides nannies with unemployment benefits if they lose their job through no fault of their own. Accurate wage reporting is essential for determining SUI eligibility.
1.3. Common Misconceptions About Nanny Income and Taxes
Several misconceptions surround nanny income and taxes. Addressing these misunderstandings can prevent unintentional errors and ensure compliance:
- Misconception: Paying a nanny in cash means you don’t have to report the income.
- Fact: All cash wages paid to a nanny are taxable and must be reported to the IRS, regardless of the payment method.
- Misconception: Nannies are always independent contractors.
- Fact: Nannies are typically classified as household employees if the employer controls not only what work is done, but also how it is done. This classification requires employers to withhold and pay employment taxes.
- Misconception: Paying “under the table” is beneficial for both parties.
- Fact: While it might seem like a way to save money, it carries significant risks, including legal penalties, loss of Social Security and Medicare benefits for the nanny, and ineligibility for tax credits for the employer.
- Misconception: You only need to report nanny income if you pay over a certain amount per year.
- Fact: While there are thresholds for Social Security and Medicare taxes (e.g., $2,800 or more in 2025), any cash wages paid to a household employee are technically subject to federal income tax, even if below the threshold for FICA taxes.
- Misconception: As long as the nanny pays their taxes, the employer is off the hook.
- Fact: Employers have specific responsibilities, including withholding and paying employment taxes, providing a W-2 form, and filing Schedule H with their personal income tax return. The nanny’s tax obligations do not relieve the employer of these duties.
2. How to Determine if Your Nanny is an Employee or Independent Contractor
The distinction between an employee and an independent contractor is crucial for tax purposes. Nannies are generally classified as employees if the employer has the right to control not only what work is done, but how it is done. This control includes setting the nanny’s schedule, providing specific instructions, and overseeing the methods used to care for the children. Misclassifying a nanny as an independent contractor can lead to significant penalties and back taxes.
2.1. Understanding the IRS Definition of a Household Employee
The IRS defines a household employee as someone who performs household work in or around your private residence and is subject to your control. This means you have the right to direct and control not only what services the worker performs but also how those services are performed.
- Control Over Work: This includes providing instructions on how to care for the children, setting the nanny’s work schedule, and specifying the methods used for discipline or activities.
- Place of Work: The work is performed in your home, which is a key factor in determining employee status.
- Employer-Provided Tools and Supplies: If you provide the tools and supplies necessary for the nanny to do their job (e.g., art supplies, cleaning products, car seats), this indicates an employer-employee relationship.
According to the IRS Publication 926, Household Employer’s Tax Guide, it clearly states that “Household workers are your employees if you can control not only the work they do, but also how they do it.”
2.2. Key Differences Between Employees and Independent Contractors
To further clarify the distinction, consider these key differences:
| Feature | Employee | Independent Contractor |
|---|---|---|
| Control | Employer controls what work is done and how it is done. | Worker controls how the work is done. |
| Training | Employer provides training and instructions. | Worker uses their own methods and expertise. |
| Tools & Supplies | Employer provides tools, materials, and supplies. | Worker provides their own tools, materials, and supplies. |
| Payment | Paid hourly, weekly, or bi-weekly. | Paid a flat fee for the job. |
| Benefits | May be eligible for benefits like paid time off, health insurance, or retirement plans (though not legally required for household employees). | Typically not eligible for benefits. |
| Tax Responsibilities | Employer withholds and pays employment taxes (Social Security, Medicare, unemployment). | Worker is responsible for paying self-employment taxes (Social Security and Medicare) and income tax. |
| Relationship | Ongoing relationship with the expectation of continued employment. | Project-based or short-term engagement. |
2.3. What Happens if You Misclassify Your Nanny?
Misclassifying a nanny as an independent contractor when they should be classified as an employee can have serious consequences. The IRS closely scrutinizes these situations, and penalties can be substantial.
- Back Taxes: You will be responsible for paying the back Social Security and Medicare taxes (both the employer and employee portions) that you should have withheld and paid.
- Penalties: The IRS can impose penalties for failure to withhold and pay taxes, failure to file accurate forms, and for misclassifying employees. These penalties can add up quickly.
- Interest: Interest will be charged on the unpaid taxes and penalties from the date they were originally due.
- Legal Issues: You may face legal action from the nanny, who could sue for unpaid wages, benefits, and taxes.
- Loss of Tax Credits: You may be required to repay any Child and Dependent Care Tax Credits you claimed if you were not properly withholding and paying employment taxes.
2.4. How to Correct a Misclassification
If you realize you have misclassified your nanny, it’s important to take corrective action as soon as possible. Here’s how:
- Consult a Tax Professional: Seek advice from a qualified tax advisor or accountant who specializes in household employment taxes. They can help you assess the extent of the misclassification and develop a plan to rectify the situation.
- File Amended Returns: File amended payroll tax returns (e.g., Form 941-X) for the years in which you misclassified your nanny.
- Pay Back Taxes, Penalties, and Interest: Calculate and pay the back taxes, penalties, and interest owed to the IRS and your state’s tax agency.
- Reclassify the Nanny: Officially classify your nanny as an employee and begin withholding and paying employment taxes going forward.
- Provide a Corrected W-2: Issue a corrected W-2 form to your nanny for the years in which they were misclassified.
By taking these steps, you can mitigate the potential consequences of misclassification and ensure compliance with tax laws. Remember, transparency and proactive correction are key to resolving these issues favorably. Consider consulting with income-partners.net for guidance on navigating these complex tax situations.
3. Employer Identification Number (EIN): Do You Need One?
An Employer Identification Number (EIN) is a unique nine-digit number assigned by the IRS to business entities for tax purposes. As a household employer, you generally need an EIN if you are required to withhold and pay Social Security and Medicare taxes or federal income tax. Obtaining an EIN is a straightforward process and essential for fulfilling your tax obligations.
3.1. Who Needs an EIN for Nanny Employment?
You need an EIN if you meet either of the following conditions:
- Withholding Social Security and Medicare Taxes: If you pay cash wages of $2,800 or more in 2025 (this threshold may change annually) to a household employee, you are required to withhold and pay Social Security and Medicare taxes.
- Withholding Federal Income Tax: If your nanny requests that you withhold federal income tax from their wages, and you agree to do so, you will need an EIN to report these withholdings.
Even if you don’t meet these conditions, having an EIN can simplify the process of filing employment taxes and providing W-2 forms to your nanny.
3.2. How to Apply for an EIN
Applying for an EIN is free and can be done online through the IRS website. Here’s a step-by-step guide:
- Visit the IRS Website: Go to the IRS website and search for “EIN application.”
- Online Application: Click on the link for the “Online EIN Application.” This service is available Monday through Friday, 7 a.m. to 10 p.m. Eastern Standard Time.
- Begin Application: Select “Begin Application” to start the process.
- Type of Applicant: Choose “Individual/Sole Proprietor” as the type of applicant.
- Reason for Applying: Select “Started a business” as the reason for applying.
- Household Employer: Indicate that you are a household employer by answering the questions about household employees.
- Provide Information: Fill out the required information, including your name, address, Social Security number, and the nature of your household employment.
- Submit Application: Review your information and submit the application.
- Receive EIN: Upon successful completion of the application, you will receive your EIN immediately online.
You can also apply for an EIN by mail or fax using Form SS-4, Application for Employer Identification Number. However, the online application is the fastest and most convenient method. International applicants may apply by calling 267-941-1099 (not a toll-free number) Monday through Friday, 6 a.m. to 11 p.m. Eastern time to obtain an EIN.
3.3. What to Do After Receiving Your EIN
Once you have your EIN, keep it in a safe place and use it for all tax-related matters involving your household employee. Here are some important steps to take:
- Record Keeping: Maintain accurate records of all wages paid, taxes withheld, and other relevant employment information.
- Tax Deposits: If you are required to withhold and pay employment taxes, make timely tax deposits to the IRS.
- File Employment Tax Returns: File the necessary employment tax returns, such as Schedule H (Form 1040), to report household employment taxes.
- Provide W-2 Form: Provide your nanny with Form W-2, Wage and Tax Statement, by January 31 of each year.
3.4. Common Mistakes to Avoid When Applying for an EIN
Applying for an EIN is generally straightforward, but here are some common mistakes to avoid:
- Using the Wrong Application: Make sure you are using the correct application form (Form SS-4) and following the instructions carefully.
- Providing Inaccurate Information: Double-check all the information you provide, including your name, address, and Social Security number, to ensure accuracy.
- Applying Multiple Times: Only apply for an EIN once. If you are unsure whether you have already obtained an EIN, contact the IRS before submitting another application.
- Sharing Your EIN: Protect your EIN and do not share it with unauthorized individuals.
- Failing to Update Information: If your business name, address, or other information changes, notify the IRS to update your records.
Obtaining and properly using an EIN is a crucial step in fulfilling your obligations as a household employer. By following these guidelines, you can ensure compliance with tax laws and avoid potential penalties. For more personalized guidance, consider consulting with income-partners.net.
4. Understanding and Paying FICA Taxes for Nannies
FICA (Federal Insurance Contributions Act) taxes are mandatory payroll taxes that fund Social Security and Medicare. As a household employer, you are generally required to withhold and pay FICA taxes if you pay your nanny cash wages of $2,800 or more in 2025. Understanding these taxes and how to calculate and pay them is essential for legal compliance.
4.1. What are Social Security and Medicare Taxes?
FICA taxes consist of two components:
- Social Security Tax: This tax funds the Social Security program, which provides retirement, disability, and survivor benefits. The Social Security tax rate is 6.2% for both the employer and the employee.
- Medicare Tax: This tax funds the Medicare program, which provides health insurance benefits for seniors and certain disabled individuals. The Medicare tax rate is 1.45% for both the employer and the employee.
Together, the total FICA tax rate is 7.65% for both the employer and the employee.
4.2. How to Calculate FICA Taxes
To calculate FICA taxes, follow these steps:
- Determine Cash Wages: Calculate the total cash wages you paid to your nanny during the year. Cash wages include wages paid by check, money order, electronic transfer, or cash.
- Check the Threshold: Verify that the cash wages meet the threshold for FICA tax liability ($2,800 or more in 2025).
- Calculate Social Security Tax: Multiply the cash wages by 6.2% to determine the Social Security tax amount for both the employer and the employee.
- Calculate Medicare Tax: Multiply the cash wages by 1.45% to determine the Medicare tax amount for both the employer and the employee.
- Total FICA Taxes: Add the Social Security tax and Medicare tax amounts for both the employer and the employee to get the total FICA taxes.
Example:
Let’s say you paid your nanny $3,000 in cash wages during 2025.
- Social Security Tax (Employee): $3,000 x 6.2% = $186
- Medicare Tax (Employee): $3,000 x 1.45% = $43.50
- Social Security Tax (Employer): $3,000 x 6.2% = $186
- Medicare Tax (Employer): $3,000 x 1.45% = $43.50
- Total FICA Taxes: $186 (Employee) + $43.50 (Employee) + $186 (Employer) + $43.50 (Employer) = $459
4.3. Paying FICA Taxes: Options and Deadlines
You have several options for paying FICA taxes:
- Electronic Funds Transfer (EFTPS): The Electronic Federal Tax Payment System (EFTPS) is the preferred method for paying federal taxes. You can enroll in EFTPS online and make payments electronically.
- Check or Money Order: You can pay by check or money order, but this method is less convenient and secure than EFTPS.
- Payroll Services: Consider using a payroll service that specializes in household employment taxes. These services can handle all aspects of payroll, including calculating and paying FICA taxes.
The deadline for paying FICA taxes depends on your filing frequency. If you file Schedule H (Form 1040), you generally pay FICA taxes annually with your individual income tax return. However, if you are a sole proprietor with business employees and file Form 941 or Form 944, you may be required to make federal tax deposits more frequently.
4.4. What is Additional Medicare Tax?
In addition to the regular Medicare tax, there is an Additional Medicare Tax of 0.9% that applies to an individual’s Medicare wages that exceed a threshold amount based on their filing status. As an employer, you are responsible for withholding this tax from your nanny’s wages if they exceed $200,000 in a calendar year, regardless of their filing status. There is no employer match for Additional Medicare Tax.
4.5. FICA Tax Exemptions
There are some exceptions to the FICA tax requirements. You do not have to withhold or pay Social Security and Medicare taxes from wages you pay to:
- Your spouse.
- Your child under the age of 21.
- Your parent, unless an exception is met.
- An employee who is under age 18 at any time during the year, unless performing household work is the employee’s principal occupation. If the employee is a student, providing household work is not considered to be their principal occupation.
Understanding and complying with FICA tax requirements is crucial for household employers. By following these guidelines and seeking professional advice when needed, you can ensure you are meeting your legal obligations and providing your nanny with the benefits they are entitled to. Contact income-partners.net for further assistance with your tax-related inquiries.
5. Federal Income Tax Withholding for Nannies: Is It Required?
As a household employer, you are not required to withhold federal income tax from your nanny’s wages unless they specifically request it. However, if your nanny asks you to withhold federal income tax and you agree, you must follow the proper procedures to ensure accurate withholding and reporting.
5.1. When is Federal Income Tax Withholding Necessary?
Federal income tax withholding is only necessary if your nanny requests it and you agree to withhold it. This is a voluntary agreement between you and your nanny. If your nanny does not request withholding, you are not obligated to do so.
5.2. How to Handle a Nanny’s Request for Withholding
If your nanny requests that you withhold federal income tax from their wages, follow these steps:
- Form W-4: Have your nanny complete Form W-4, Employee’s Withholding Certificate. This form provides you with the information you need to determine the correct amount of federal income tax to withhold.
- Review Form W-4: Carefully review the completed Form W-4 to understand your nanny’s withholding preferences.
- Calculate Withholding: Use Publication 15-T, Federal Income Tax Withholding Methods, to calculate the amount of federal income tax to withhold from each paycheck. This publication provides tax withholding tables that are updated each year.
- Withhold Taxes: Withhold the calculated amount of federal income tax from your nanny’s wages each pay period.
- Record Keeping: Keep accurate records of all wages paid, taxes withheld, and Form W-4.
- Pay Taxes: Pay the withheld federal income tax to the IRS according to the applicable payment schedule.
- Form W-2: Provide your nanny with Form W-2, Wage and Tax Statement, by January 31 of each year.
5.3. Using Form W-4 to Determine Withholding
Form W-4 is a crucial document for determining the correct amount of federal income tax to withhold from your nanny’s wages. Here are some key sections of the form:
- Personal Information: Your nanny will provide their name, address, Social Security number, and filing status.
- Multiple Jobs or Spouse Works: This section is used to account for situations where the nanny has multiple jobs or their spouse also works. It helps ensure that the correct amount of tax is withheld.
- Claim Dependents: Your nanny can claim dependents, which may reduce the amount of tax withheld.
- Other Adjustments: Your nanny can make other adjustments, such as itemized deductions or tax credits, which can further affect the amount of tax withheld.
- Sign and Date: Your nanny must sign and date the form to certify that the information provided is accurate.
It’s important to emphasize to your nanny that they should complete Form W-4 accurately to avoid under- or over-withholding. The IRS provides resources and tools to help employees determine the correct amount of withholding.
5.4. Paying Withheld Federal Income Taxes
The frequency with which you must pay withheld federal income taxes depends on your total tax liability. The IRS has two main payment schedules:
- Monthly: If your total employment taxes for the lookback period (the 12-month period that ended the June 30th before the start of the previous calendar year) were $2,500 or less, you are a monthly schedule depositor. You must deposit employment taxes on or before the 15th day of the following month.
- Semi-Weekly: If your total employment taxes for the lookback period were more than $2,500, you are a semi-weekly schedule depositor. You must deposit employment taxes depending on when you paid your employees:
- If you pay your employees on Wednesday, Thursday, or Friday, you must deposit employment taxes on or before the following Wednesday.
- If you pay your employees on Saturday, Sunday, Monday, or Tuesday, you must deposit employment taxes on or before the following Friday.
You can pay withheld federal income taxes using EFTPS or other approved methods. It’s important to make timely deposits to avoid penalties. Contact income-partners.net for advice on tax-related issues.
6. Form W-2: Completing and Providing Wage and Tax Statements
Form W-2, Wage and Tax Statement, is a crucial document that you must provide to your nanny each year. It summarizes their earnings and the taxes withheld from their wages. Completing and providing Form W-2 accurately is essential for both your nanny’s tax filing and your own compliance with tax laws.
6.1. What is Form W-2 and Why is It Important?
Form W-2, Wage and Tax Statement, is a document that reports the following information:
- Employee’s Wages: The total wages, salaries, tips, and other compensation paid to the employee during the year.
- Federal Income Tax Withheld: The amount of federal income tax withheld from the employee’s wages.
- Social Security Tax Withheld: The amount of Social Security tax withheld from the employee’s wages.
- Medicare Tax Withheld: The amount of Medicare tax withheld from the employee’s wages.
- Employer Information: The employer’s name, address, and EIN.
- Employee Information: The employee’s name, address, and Social Security number.
Form W-2 is important for several reasons:
- Employee Tax Filing: Employees use Form W-2 to file their individual income tax returns.
- IRS Reporting: Employers use Form W-2 to report wages and taxes to the IRS.
- Social Security and Medicare Benefits: The Social Security Administration and Medicare use Form W-2 information to track earnings and determine eligibility for benefits.
6.2. How to Complete Form W-2
To complete Form W-2 accurately, follow these steps:
- Gather Information: Collect all necessary information, including your EIN, your nanny’s Social Security number, and accurate records of wages paid and taxes withheld.
- Employer Information: Enter your employer information in Boxes a through f, including your EIN, name, and address.
- Employee Information: Enter your nanny’s information in Boxes g through i, including their Social Security number, name, and address.
- Wages and Compensation: Enter the total wages, salaries, tips, and other compensation paid to your nanny in Box 1.
- Federal Income Tax Withheld: Enter the total federal income tax withheld from your nanny’s wages in Box 2.
- Social Security Wages: Enter the total wages subject to Social Security tax in Box 3. This amount is generally the same as Box 1, up to the Social Security wage base limit ($168,600 for 2025).
- Social Security Tax Withheld: Enter the total Social Security tax withheld from your nanny’s wages in Box 4.
- Medicare Wages and Tips: Enter the total wages and tips subject to Medicare tax in Box 5.
- Medicare Tax Withheld: Enter the total Medicare tax withheld from your nanny’s wages in Box 6.
- Additional Medicare Tax: If applicable, enter the amount of Additional Medicare Tax withheld in Box 6.
- State and Local Information: If applicable, enter state and local tax information in Boxes 15 through 20.
- Review and Verify: Double-check all the information on Form W-2 to ensure accuracy.
- Provide to Employee: Provide your nanny with copies B, C, and 2 of Form W-2 by January 31 of each year.
- File with Social Security Administration: File Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration (SSA) by January 31 of each year.
6.3. Deadlines for Providing and Filing Form W-2
It’s crucial to adhere to the deadlines for providing Form W-2 to your nanny and filing it with the SSA:
- Provide to Employee: You must provide your nanny with copies B, C, and 2 of Form W-2 by January 31 of each year.
- File with SSA: You must file Copy A of Form W-2 with Form W-3 with the SSA by January 31 of each year.
Failing to meet these deadlines can result in penalties.
6.4. How to Correct Errors on Form W-2
If you discover an error on Form W-2 after it has been provided to your nanny and filed with the SSA, you must correct it as soon as possible. Here’s how:
- Obtain Form W-2c: Obtain Form W-2c, Corrected Wage and Tax Statement, from the IRS website.
- Complete Form W-2c: Complete Form W-2c with the corrected information.
- Provide to Employee: Provide your nanny with copies B and C of Form W-2c.
- File with SSA: File Copy A of Form W-2c with Form W-3c, Transmittal of Corrected Wage and Tax Statements, with the SSA.
Be sure to follow the instructions on Form W-2c and Form W-3c carefully to ensure accurate corrections.
6.5. Resources for Completing Form W-2
Several resources are available to help you complete Form W-2 accurately:
- IRS Instructions: The IRS provides detailed instructions for Form W-2, which can be found on the IRS website.
- IRS Publications: IRS Publication 15, Circular E, Employer’s Tax Guide, provides comprehensive guidance on employment taxes, including Form W-2.
- Payroll Services: Consider using a payroll service that specializes in household employment taxes. These services can handle all aspects of payroll and ensure accurate completion of Form W-2.
- Tax Professionals: Consult with a qualified tax advisor or accountant for personalized assistance.
Completing and providing Form W-2 accurately is a critical responsibility for household employers. By following these guidelines and utilizing available resources, you can ensure compliance with tax laws and provide your nanny with the information they need to file their taxes correctly. Income-partners.net offers further insights into tax and financial reporting for household employers.
7. Federal Unemployment Tax Act (FUTA) Tax: What You Need to Know
The Federal Unemployment Tax Act (FUTA) tax is a federal tax that employers pay to fund state unemployment programs. As a household employer, you may be required to pay FUTA tax if you meet certain criteria. Understanding FUTA tax and your obligations is essential for compliance with federal tax laws.
7.1. What is FUTA Tax and How Does It Work?
FUTA tax is a federal tax that employers pay to fund state unemployment programs. These programs provide unemployment benefits to workers who lose their jobs through no fault of their own.
The FUTA tax rate is 6% of the first $7,000 of cash wages you pay to each household employee during the year. However, you may be able to take a credit of up to 5.4% against your FUTA tax liability for amounts you paid into state unemployment funds, resulting in a net tax rate of 0.6%.
7.2. Who is Required to Pay FUTA Tax?
You are generally required to pay FUTA tax if you meet either of the following conditions:
- You paid cash wages of $1,000 or more to household employees in any calendar quarter during the calendar year or the prior year.
- You employed one or more household employees for at least some part of a day in any 20 or more different weeks during the calendar year or the prior year.
However, do not count wages paid to your spouse, your child who is under the age of 21, or your parent. Also, do not consider cash wages that you pay to a household employee in excess of $7,000 as wages subject to FUTA tax.
7.3. Calculating FUTA Tax
To calculate FUTA tax, follow these steps:
- Determine FUTA Wages: Calculate the total cash wages you paid to each household employee during the year, up to $7,000 per employee.
- Apply the FUTA Tax Rate: Multiply the FUTA wages by the FUTA tax rate (6%).
- Calculate the Credit: Determine the amount of credit you can take for amounts you paid into state unemployment funds. This credit is typically 5.4%, resulting in a net FUTA tax rate of 0.6%.
- Calculate Net FUTA Tax: Subtract the credit from the total FUTA tax to determine the net FUTA tax you owe.
Example:
Let’s say you paid your nanny $8,000 in cash wages during 2025. Since only the first $7,000 is subject to FUTA tax, you would calculate FUTA tax as follows:
- FUTA Wages: $7,000
- FUTA Tax (Gross): $7,000 x 6% = $420
- Credit (Assuming 5.4%): $7,000 x 5.4% = $378
- Net FUTA Tax: $420 – $378 = $42
7.4. Paying FUTA Tax
You must deposit FUTA tax quarterly if your FUTA tax liability exceeds $500 for the quarter. If your FUTA tax liability is $500 or less for the quarter, you can either deposit it or carry it over to the next quarter. If your FUTA tax liability is $500 or less for the entire year, you can pay it with your Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
You must deposit FUTA tax using EFTPS. The deadlines for depositing FUTA tax are:
- Quarter 1 (January 1 – March 31): April 30
- Quarter 2 (April 1 – June 30): July 31
- Quarter 3 (July 1 – September 30): October 31
- Quarter 4 (October 1 – December 31): January 31
7.5. Filing Form 940
You must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report FUTA tax. The deadline for filing Form 940 is January 31 of each year. However, if you deposit all your FUTA tax when due, you may file Form 940 by February 10.
You can file Form 940 electronically or by mail. Follow the instructions on the form to complete it accurately and file it on time. income-partners.net is also available to help you with your tax-related questions.
8. Schedule H (Form 1040): Reporting Household Employment Taxes
Schedule H (Form 1040), Household Employment Taxes, is the form you use to report household employment taxes, including Social Security, Medicare, and FUTA taxes, on your individual income tax return. Understanding Schedule H and how to complete it accurately is crucial for complying with federal tax laws.
8.1. What is Schedule H and When Do You Need to File It?
Schedule H (Form 1040), Household Employment Taxes, is a form you attach to your individual income tax return (Form 1040, 1040-SR, or 1040-NR) to report household employment taxes. You need to file Schedule H if you:
- Paid cash wages subject to Social Security and Medicare taxes.
- Paid wages subject to FUTA tax.
- Withheld federal income tax from your employee’s wages.
You do not need to file Schedule H if you only paid wages to your spouse, your child under age 21, or your parent.
8.2. How to Complete Schedule H (Form 1040)
To complete Schedule H (Form 1040) accurately, follow these steps:
- Part I: Social Security, Medicare, and Income Taxes
- Enter your nanny’s name and Social Security number.
- Report the total cash wages you paid to your nanny during the year.
- Calculate and enter the Social Security and Medicare taxes you owe.
- Report any federal income tax you withheld from
