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Next you have to figure whether you need to pay employment taxes. In general, if you pay wages of $1,400 or more, you are responsible for withholding 7.65 percent from your nanny's paycheck (6.2 percent for Social Security and 1.45 percent for Medicare) and matching the same amount for a total of 15.3 percent. Some parents pay the full 15.3 percent out of their own pocket to ease the tax burden on their nanny.
One bit of good news: You don't pay Social Security or Medicare taxes for any employee under age 18 -- their wages are exempt. (Nor, for that matter, do you have to pay those taxes for your spouse or parent or a child under age 21, if any of those relatives work for you.)
You'll also owe federal unemployment tax (FUTA) if you pay wages of $1,000 or more in any calendar quarter (about $75 a week). The rate is 0.8 percent on the first $7,000 paid during the year ($56) as long as you pay state unemployment tax on time. Check with your state's unemployment agency to see if you owe state unemployment tax as well. A list is in the appendix to IRS Publication 926, the Household Employer's Tax Guide.
You may withhold federal or state income tax from your employee's paycheck if she asks you to, but you are not required to do so. However you must make advance Earned Income Credit (EIC) payments if your nanny gives you a completed Form W-5. (The Earned Income Credit is a tax credit for working, low-income individuals and families that can reduce the amount of federal tax owed or result in a refund. Find out more at the