Grow up and pay the 'nanny tax' if you owe it

By Jeff Schnepper

If you hire someone to mow your lawn or to take care of your children, you need to know about the "nanny tax" and when you're responsible for paying it.

The nanny tax is the federal requirement that you pay the employment taxes on household employees. This column will explain the tax to you and guide you through its complexities.

In the mid-1990s, Congress took a closer look at the nanny tax, suspecting that many employers weren't paying the tax for their domestic help. A 1994 analysis found that of the 2.5 million household employers in the United States, only 500,000 had paid the required taxes.

To clamp down on the deadbeats, Congress changed the law, providing for some exceptions, but also requiring that employers report any employment taxes on their federal income tax returns. Failure to report these taxes could mean substantial penalties and interest and, if criminal fraud is found, imprisonment.

The tax code requires payroll tax filings if you paid a household employee more than $1,700 in wages in 2009. If you pay each household worker less than $1,700 this year, neither you nor the employee owes any federal payroll taxes on those wages.

What counts is when the wages are paid, not when the services are rendered. That means that if you are close to the limit, it might be worthwhile to both you and your employee to wait until next year to transfer that final check. Even if you have to "lend" the money for a short period, the tax savings may be worth it. On $1,701 in wages, the federal taxes are $170.

Here are the payroll taxes you're obligated to pay:

• Social Security. 6.2% is withheld from the employee and matched by you for up to $106,800 in 2009. These taxes, mandated by the Federal Insurance Contributions Act, and known as FICA on your payroll check, provide for a federal system of old-age, survivors and disability insurance for workers and their families.

• Medicare. 1.45% is withheld from the employee and matched by you with no limit in wages. These taxes pay for hospital insurance when you reach age 65.

• Federal unemployment taxes. You pay 6.2% on the first $7,000 in wages, but this amount is reduced by a credit of 5.4%, resulting in a net tax of 0.8% if you paid all your required state unemployment/disability taxes.

• State unemployment and disability taxes. You are responsible for the payment of both your share and your employee's share. If you don't withhold, you are still responsible for these taxes.

You need to pay these taxes for your "household employees." Household work is done in and around your home by nannies, babysitters, health aides, private nurses, house cleaners, caretakers, yard workers and similar domestic workers.

Continued: Your employee or self-employed?

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