Babysitter taxes: How do babysitters report income?

Mom sitting with toddler

Taxes can be such a daunting topic! There seem to be so many of them, under Federal and State laws.It can feel stressful for parents and babysitters to understand and comply with tax obligations.Let us help by demystifying the income taxes that relate to babysitters and nannies.

What taxes do babysitters pay?

Taxes paid by a babysitter or nanny depend on whether the carer is a ‘household employee’ or ‘self employed’.

What defines a nanny as a ‘household employee’?

A nanny is considered a household employee by the IRS if

  • The employer dictates what work is done, when and how it is done
  • The employer provides and supplies and equipment the nanny needs
  • The nanny is paid more than $2,600 per calendar year.
  • The nanny is over 18 & is not a family member

Common household employees include

  • Nannies
  • Cooks/Chefs
  • Chauffeurs
  • Housekeepers
  • Private nurses

Services that are not of a household nature, such as tutoring, do not fall under this category.

Most of the time a nanny is defined as a household employee, based on the IRS’ definition and the demands of the role.

When is a babysitter defined as ‘self employed’?

A babysitter is considered self employed by the IRS if they

  • Offer their services to the general public (i.e., many jobs, not just one)
  • Dictate their own work - how and when they work, not a set schedule
  • Provide their own tools.

Who pays tax when the nanny is a ‘household employee’?

When parents engage a ‘household employee’ (like a nanny or housekeeper) they are considered ‘household employers’ by the IRS.Parents are then responsible for paying and withholding “nanny tax”, which includes Social Security, Medicare and unemployment taxes.

What is the ‘nanny tax’?

The ‘nanny tax’ is a term used to describe a combination of Federal and State taxes that employers (parents) pay when they hire a household employee (a nanny).This applies when the nanny earns over $2,600 in any calendar year.It includes

  • Taxes that are withheld from the employee
  • Taxes paid by the employer

The taxes cover Federal and State income taxes, Medicare, Social Security and unemployment insurance.Details will vary depending on your State tax laws.

Who pays the tax when the babysitteris ‘self employed?’

When a babysitter or a nanny is self-employed and earns over $400 in a tax year then they must report their own income to the IRS and pay taxes.The parents do not have to withhold or pay tax on the babysitter’s behalf in this case.Find out more information about paying tax when self employed here.

Do babysitters have to report income if it’s under $400?

Great news!If a babysitter earns less than $400 in a tax year they don’t have to report it or pay tax.

What forms do nannies need to provide to employers?

If a nanny is a household employee they must provide the employer with

  1. A social security number or an ITIN (Individual Tax Payer Identification Number)
  2. A completed Employment Eligibility Form I-9 with identification
  3. A completed Federal W-4 Form (Federal Withholding Tax) and
  4. A relevant State tax withholding form.

What do employers need to process nanny taxes?

There are 5 main steps involved for a household employer to manage the nanny tax.

  1. Register through the IRS for an Employer Identification Number (EIN) to set up payment and employment tax accounts with federal and state authorities.
  2. Record the nanny’s pay and any taxes withheld and paid for each pay period.
  3. File tax returns regularly - for some states it’s monthly, quarterly or annually.
  4. Complete ‘end of year’ tax forms - this includes
    • Form W-2 (Wage and Tax Statement) and W-3 by the end of January.
    • Schedule H (Household Employment Taxes)
    • Annual Reconciliation Form for your State if required.

Are there nanny payroll or tax services?

There are lots of services available to help parents who are ‘household employers’.These include accountants and payroll specialists.They can run the payroll regularly, complete paperwork and submit tax returns. Many of them charge a flat monthly fee to handle the nanny’s pay and tax.

Why pay taxes?

Given the complexity of this process, many people wonder why they should pay taxes.Understandably!It is important for nannies to have a legal record of a job and a steady income.This helps them establish a reliable work history, with evidence of a wage. This enables a nanny to do things like rent an apartment, apply for credit cards, get car loans and a house mortgage.By having a legal work history this also gives the nanny a safety net, making them eligible for unemployment benefits, social security income, and subsidized health insurance through the Affordable Care Act.

Employers also get tax breaks that help them offset the cost of the nanny.Employers may be able to pay for some of their childcare with ‘pre tax’ dollars.Employers may also be able to get tax credits on some care-related expenses.

Overall it’s important for income earners to pay taxes as this helps the government pay for public goods and services.It contributes to valuable programs in society like health, education and infrastructure.

What happens if you don’t pay tax?

The IRS considers this ‘tax evasion’ and employers may be required to pay back taxes and additional fines.

For more detailed information please refer to the IRS which provides all the forms, information and answers for tax questions.

We hope this helps you understand the requirements related to babysitter taxes and how babysitters report income.