Hiring a nanny or other household help can be a lifesaver for busy families. They provide invaluable support, caring for your children and allowing you to focus on other priorities.
However, before welcoming a nanny into your home, it’s crucial to understand the legalities involved, specifically the “nanny tax.”
What is the Nanny Tax?
The nanny tax refers to the federal and state payroll taxes that families in Colorado must pay when they employ household workers like nannies, housekeepers, or personal assistants.
These taxes ensure your nanny receives the same social security and Medicare benefits as other employees, while also contributing to unemployment insurance and federal income tax. It’s incredibly important to ensure your household help is taken care of with these taxes.
Why is the Nanny Tax Important?
Complying with the nanny tax offers benefits for both families and nannies:
- Employee Benefits: By paying the nanny tax, your nanny becomes eligible for Social Security and Medicare benefits, crucial for their financial security in the long run. Your household help takes care of your children and home, the tax helps ensure they are taken care of and get all of the benefits they deserve.
- Avoid Legal Issues: Failing to pay the nanny tax can result in penalties, back taxes, and even potential legal trouble.
- Peace of Mind: Knowing you’re compliant with tax regulations and have a social security net ensures peace of mind for both you and your nanny.
Determining if You Owe the Nanny Tax
Not all household helpers qualify as employees triggering the nanny tax. Here’s how to know if you need to comply:
- Household Employee: The worker performs duties in your home, like childcare, cleaning, cooking, or household management. In some cases, for example if you engage in a “nanny share” with another family, you may still be required even if some of their work is in another household.
- Cash Wages: You pay the worker cash wages, not through a payroll service.
- Threshold Met: You pay a worker over 18 years of age $2,700 or more in cash wages in a calendar year, OR $1,000 in a calendar quarter.
If all these criteria are met, you’re responsible for withholding and paying nanny taxes.
Steps to Comply with the Nanny Tax
Complying with the nanny tax has multiple steps and considerations. We want to preface this by saying it can seem like a lot, which is why it’s worth it to invest in tax professionals to ensure everything is completed correctly.
1. Onboarding Steps:
When you’re just getting started, there’s a lot of initial paperwork. Ensure you’ve taken care of the following as soon as you’ve chosen new household help.
- The Employer Identification Number (EIN) obtained from the IRS is like a Social Security number for your household. You’ll need this for tax purposes. The IRS lays out the steps for you here.
- Fill out and submit Form I-9, which verifies your nanny’s eligibility to work in the US.
- Report new employees and contractors to the Colorado Department of Labor and Employment within 20 days of hire.
- Fill out a CR 0100A.This form is used to establish a Colorado Withholding Account for your household employee.
- Register for an unemployment insurance account. Colorado requires employers to pay unemployment insurance taxes. You’ll need to register for an account and report wages to the state.
2. Filing Form W-4 and DR-0004:
Of course, the form filling out has only just begun! Here are two more forms you’ll need to ensure are taken care of in this process:
- Ensure your employee fills out form W-4, which allows them to claim any withholding allowances they qualify for.
- DR-0004 is a Colorado-specific form similar to the federal W-4 for calculating withholding. While employees are not required to fill it out, employers may use the information from the W-4 to assist them in filling out the form to fine-tune their Colorado withholdings.
3. Calculating Withholdings:
Here’s where things can start to get complicated, and why we suggest you find tax experts to make sure you’re doing this correctly.
As the employer, you’re responsible for withholding relevant taxes from your nanny’s paycheck. You’ll need to consider:
- Federal Income Tax: Determine your nanny’s filing status (single, married, etc.) and use the IRS withholding tables to calculate the appropriate amount to withhold based on their expected annual income.
- State Income Tax: Colorado has a state income tax, so you’ll need to calculate and withhold the appropriate amount based on your nanny’s income and filing status.
- Social Security and Medicare Taxes (collectively known as FICA): These taxes are typically 15.3% of your nanny’s gross wages, split between you and your nanny (7.65% each).
- FAMLI Tax: With under 10 employees, you are not required to pay the FAMLI tax, but will withhold it from an employee’s income to ensure they can take leave if needed to take care of their own families.
- Local Taxes: Some cities or counties may have additional local income taxes that need to be withheld.
- Other Withholdings: If your nanny has requested additional withholdings, such as for health insurance premiums or retirement contributions, these must also be calculated and withheld.
4. Paying Employment Taxes:
Nanny taxes are typically paid quarterly through the Electronic Federal Tax Payment System (EFTPS). This online portal is most popular, but you can also pay with:
- Direct Debit: Some financial institutions offer direct debit services to automatically withdraw tax payments from your account.
- Physical Check or Money Order: You can mail a check or money order to the IRS, but this method is less efficient and can lead to processing delays.
- Commercial Payment Agents: Certain authorized payment agents may accept tax payments on your behalf, but fees may apply.
5. Filing Tax Forms:
At the end of the year, you’ll need to file Schedule H (Form 1040) with your federal tax return.
This is a good time to double-check you’re up-to-date with all of your state filing obligations as well, such as the quarterly unemployment insurance payments.
You’ll also need to provide your employee with a W-2 form, which summarizes the payments and withholdings made for the previous year. The W-2 provides the nanny with the information they need to file their personal tax return.
Momentum.tax Can Help You Claim the Nanny Tax
The maze of forms and taxes may be confusing, but their overarching goal is important: taking care of the people who are taking care of our families and homes. It’s worth the effort.
But you’re probably seeking a nanny or household help because you have a busy life. Adding all of this paperwork isn’t making things easier and can be overwhelming.
But we’re here to help!
Our team of tax professionals can handle the entire nanny tax process for you, ensuring accurate and hassle-free compliance. From obtaining an EIN to filing quarterly taxes and year-end forms, we take care of everything so you can focus on what matters most – your family and a happy nanny.
We’re based in Colorado, so this is our speciality! Rest easy that all the small details are taken care of with the Momentum Tax team. Contact us today!
