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How to Pay the Tax
Finally, how do you pay the nanny tax? Use Schedule H, the Household Employment Taxes form (for more information on this form see the IRS page on this topic, to calculate Social Security, Medicare, FUTA and any withheld federal income taxes. Add the total to your own income tax and pay by April 15 with your return. If you own your business you can report the nanny tax with payroll taxes for other employees on Forms 941 and 940 instead. You will also need to give your nanny a W-2 and file Copy A and Form W-3 with the Social Security Administration.
Sound like an accounting nightmare? Fortunately, there are some resources you can tap to ease the burden. The aforementioned IRS Publication 926, the Household Employer's Tax Guide, takes you step by step through the process. You can download it or get a copy by mail by calling 1-800-829-3676. You can buy software that calculates taxes and prints pay stubs for about $60. Or you can sign up for a nanny payroll service for about $40 a month plus a setup fee. Search for "nanny tax" on the Web for a list of vendors.
Is it really necessary to collect and pay all these taxes if you have a household employee? In a word, yes. Not only is it the right -- and legal -- thing to do, you will probably get a tax break for playing by the rules. If your employer has a child care spending plan, you can pay for baby-sitting expenses up to $5,000 per year with dollars that are free of federal, state and payroll taxes. If your employer does not offer a plan, you can still qualify for a dependent-care tax credit of 20 to 35 percent of your expenses up to $3000 for one child or $6000 for two or more children.