 Sorting
out nanny tax rules
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 Dear
Tax Talk,
My wife and I both work and we have a 4-year-old son. We
hire my parent to take care of our son and pay her a total of $5,000/year. Are
we required to pay employment taxes on the wages and issue her a W-2?
If
we are not required to pay employment taxes on the wages, can my parent still
file her income tax return and receive her work credit? Thank you very much for
your response.
-- Bao
 Dear
Bao,
IRS Publication 926 discusses employment taxes for household employees.
For many years, household employment slid under the radar of taxes, until some
presidential nominees got into hot water for hiring illegal nannies. Now the IRS
makes it somewhat simpler to comply with your obligations for taxes on household
help.
Principally, the IRS is looking to collect Social
Security and Medicare taxes on wages paid to your household help.
The rate is 7.65 percent for the employer, and you must withhold
7.65 percent from payments to the employee (for a total of 15.3
percent). If you choose, you can pay the 7.65 percent that is supposed
to be withheld from the employee, but you would count this as additional
wages to the employee when you issue her a Form W-2 at the end of
the year.
For
example, if you pay $100 to your employee, you would pay $7.65 in payroll taxes
and would need to collect $7.65 from your employee. Since your employee may not
appreciate receiving $92.35, you may go ahead and pay him or her $100. At the
end of the year, you owe the IRS with your Form 1040 $15.30 for payroll taxes,
and you would give your employee a W-2 for $107.65. Of course, there are thresholds.
You don't have to file and pay on wages that are less than $1,500 in a year.
You also owe federal unemployment tax, but that's
only $8 for every $1,000 in wages. You might also owe state income
and employment taxes, depending on the state in which you live.
Cash wages paid to a parent for in-home services are
generally not considered wages for purposes of household employment taxes. However,
you count these wages if both of the following conditions apply.
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Household employment tax rules: | |
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Since
you are married, you would not provide your mother with a Form W-2. Since she
does not have wages, she would not qualify for the earned income credit. To
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