Household employers can avoid nanny tax pitfalls
By Kay Bell • Bankrate.com

Balancing work and child rearing is challenging enough. But if you get outside help for these chores, you'll also have to decipher the complexities of tax and labor law.

This is exactly the situation faced by many Americans who pay for child care. And if this helper regularly comes to you, rather than you dropping Jimmy and Susie off at a day-care center, then you'll likely pay Uncle Sam as well as your nanny.

- advertisement -

Although it's popularly referred to as the "nanny tax," any household help -- including a gardener, private nurse or maid -- is going to cost you more than salaries. In most cases, you also have to pay employment taxes for domestic workers.

The employment tax requirement is important not only to your household help, but also to your personal tax return bottom line. Because those taxes are folded into your personal income tax return, you need to figure the help's taxes accurately and keep track of them so they don't cost you even more come April.

Tax types and limits
There are two separate employment taxes to consider. Whether you're responsible for either hinges on the amount you pay and how much control you have over the way the job is done.

First is FICA, the Federal Insurance Contributions Act amount that almost every wage earner sees taken out of his or her paycheck. This tax money goes to pay for the worker's future Social Security and Medicare distributions.

If you paid a household employee $1,400 or more in 2005, you must pay FICA taxes for that person. (The 2006 threshold goes to $1,500.) This 15.3 percent tax generally is split equally between the worker and boss, with each paying 6.2 percent of income toward Social Security plus 1.45 percent for Medicare.

Then there is the Federal Unemployment Tax Act (FUTA) payment that covers unemployment compensation to workers who lose their jobs.

The unemployment tax is paid only by the employer. It's required if your total household salaries are $1,000 or more in any calendar quarter. You generally must pay unemployment tax on the first $7,000 of cash wages you pay to each of your household employees.

While the employer alone foots this 6.2 percent tax, you may be able to get some of that money back as a credit. Keep in mind, however, that you might have to pay into your state's unemployment fund, too.

Who's the boss?
But what you pay your help isn't the only consideration when it comes to employment taxes. The control factor is just as important.

A household worker is your employee if you directly manage not only what work is done, according to the Internal Revenue Service, but also how it is done. It doesn't matter if the worker is full-time or part-time or whether you pay on an hourly, daily or weekly basis or by the job. If you are in charge of job particulars, the IRS deems you in control and you must pay the appropriate taxes.