Q: We're getting a nanny for our new baby and have heard a lot about how legally you must pay a "nanny tax." But we've noticed that quite a few of our friends don't actually pay it. What's the law on this?
A: "Nanny tax" is a term used to describe the employment taxes required by law if you pay someone to work in your home. "If you have a household employee, there are several tax rules that you must abide by," explains Alan Goldberg, president of NannyTax, Inc., in New York City, a national payroll-tax service that works exclusively with household employers.
The taxes fall into three categories: Social Security (FICA) and Medicare taxes, unemployment tax, and income tax, says Arthur Ellis, president of The Nanny Tax Company, a national payroll-tax service in Chicago.
For 2003, anyone who pays at least $1,400 to a babysitter who isn't a parent, spouse, child age 20 or younger, or person age 17 or younger needs to pay Social Security and Medicare taxes, according to Goldberg.
As an employer, you're responsible for paying your share and your nanny's share of Social Security and Medicare taxes, which total 7.65% of her wages from each of you. To cover the costs of paying her portion, you can withhold this amount from her salary. You must report these taxes annually with your 1040 return using a schedule H form.