August 16, 2021
By Ryan Footer, Senior Accountant
The COVID-19 pandemic introduced new hardships for American workers including record job losses, career changes, temporary jobs and remote work. The family home suddenly became both workplace and classroom, prompting more families to seek household help. For 2020 and 2021, the federal government implemented “nanny tax” credits to encourage these employers to offer paid sick and family leave related to COVID-19 to their household employees. If your family hired in-home help during the pandemic, it is important to understand the tax laws around household employment and how the nanny tax credits will impact you.
Are Household Employment Taxes Applicable to You?
If you hired someone to perform household work for you, you are subject to household employment taxes and required to complete schedule H of your tax return. This individual is considered your employee if you, as the homeowner, control what and how the work is done. Business owners who provide their own services as independent contractors, such as repairmen, plumbers, and contractors, aren’t considered your employees, however. Additionally, if you paid your employee less than $2,300 in wages for 2021 ($2,200 for 2020), you are not subject to household employment taxes. If you paid total cash wages of $1,000 or more in any calendar quarter of 2020 to household employees, you are required to pay federal unemployment tax (FUTA).
How do you know if your employee is doing “household work”?
To qualify, “household work” must be work done in or around your home. Examples of these types of services include, but are not limited to:
- Domestic Workers
- Health Aides
- Private Nurses
- Yard workers
Services performed in your home but not of a “household nature” are not considered household work. Two examples of this are a private secretary or tutor.
Compliance with the Nanny Tax
If you conclude that you employ a qualifying household employee and are required to pay household employment taxes, you will need to do the following:
1) Obtain an Employer Identification Number and register with your state (states vary on the household employer registration).
2) During annual tax reporting, file Schedule H with your Form 1040 to report the cash wages, Social Security and Medicare Taxes, Federal Unemployment Tax (FUTA) and State Unemployment tax (SUI), and pay the additional tax due included your income tax amount.
- Total taxes are 15.3% of cash wages. Your share of this is 7.65% (half), and the other half is the employee’s share. As the employer, you are eligible to pay yourself and not withhold it, or you may withhold it on the paycheck.
- FUTA is 6% of cash wages, up to $7,000 (per employee).
- State unemployment taxes (SUI) may also be required. If your state requires periodic withholding, you may also be required to withhold and pay SUI each period. Be sure to consult your tax advisor regarding SUI.
3) When filing your annual payroll tax return, file a W-2 and W-3 and distribute the W-2 to your household employee.
2021 Legislative Changes for the Nanny Tax Credit
On March 18, 2020, The Families First Coronavirus Response Act (FFCRA) was enacted in response to the onset of the COVID-19 pandemic. The legislation provided household employers a tax credit that reimbursed them for the cost of providing paid sick and family leave wages to employees for leave related to COVID-19. This credit, originally set to expire on March 31, 2021, has been extended through September 31, 2021 under American Rescue Plan Act of 2021.
The credit applies to qualified sick and family leave wages paid for leave taken between March 31, 2020 and September 31, 2021, however any qualified sick and family leave wages paid in 2021 for 2020 leave should be claimed on the 2021 tax return.
The Nanny Tax and You
Are you subject to household employment taxes? Below is a quick checklist to help taxpayers understand their tax liability.
- Did I pay a nanny, or someone to do any of the household work listed above, so that I can work or look for a job?
- Did I pay $2,300 or more to a household employee in 2021, withhold federal income tax, or pay total cash wages of $1,000 or more in any calendar quarter?
- Did I pay that employee any sick or family leave due to the COVID-19 pandemic?
If you answered yes to any of the above, you may be subject to the nanny tax reporting requirements. Once you properly report the tax on your household employee, you may be eligible for the nanny tax credit for paid COVID-19 sick/family leave, as well as other tax breaks such as the child or dependent care tax credit or medical expense deduction. Household payroll expenses are also qualified for payment via a Flexible Spending Account (FSA) if your own employer offers these benefits. If you have already filed your 2020 return without properly reporting your household employee’s wages and related nanny tax, consider amending your return to comply with the tax law and receive tax benefits available to you.
Taxpayers with household employees are subject to various nanny tax reporting requirements. Consult your CPA or tax advisor regarding compliance with the household employment tax and file for any benefits you are due for 2021. For more information about the nanny tax or other COVID-19 tax considerations, contact Jennifer Galstad-Lee at email@example.com.
Jennifer Galstad-Lee, CPA, JD
GRF CPAs & Advisors