Defining "The Nanny Tax": Why and How Taxes Apply to Babysitters (& Others)

What Exactly is a "Household Employee"?

Under federal law, your nanny, babysitter or housekeeper may be considered a "household employee." Makes sense—they work in your house, after all. According to the IRS, you have a household employee if the person works in/around your home while you either control what work he or she will do or set requirements on how that work will be done. This includes your babysitter.

It doesn't matter if she or he works full-time or part-time, or whether you pay hourly, weekly or monthly. All that matters is that YOU have the right to control the details of how the work is done. (Note: If you use a caregiver from an agency, the agency is the one who employs the caregiver and controls the work, so you would not owe taxes on those caregivers.)

Which Taxes Must You Pay

For any household employee, you may need to withhold (and pay) Social Security and Medicare taxes, pay federal unemployment tax, or both. It all comes down to your caregiver's income.

  • If you paid your caregiver $1,600 or more in 2008, you must withhold and pay Social Security and Medicare.
  • According to the Federal Unemployment Tax Act (FUTA), if you paid your caregiver $1,000 or more in any calendar quarter of 2008, you must pay federal unemployment tax. (You may also owe state unemployment taxes; contact your state's unemployment tax agency to find out.)
  • If you're not sure what your caregiver will earn each year, withhold the taxes anyway and simply pay your caregiver back if her earnings don't reach the $1,600 threshold each year.
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