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

Paying Social Security and Medicare

Both you and your caregiver may be responsible for paying Social Security and Medicare. In fact, you'll both pay the same total amount. (That makes the math a little easier!) Both of you will pay 7.65 percent of the caregiver's income—that's 6.2 percent for Social Security and 1.45 percent for Medicare, in case you want a breakdown.

If, for example, your babysitter makes $100 each week, you should withhold $7.65 from each weekly paycheck and pay her the remaining $92.35. You'll then match the $7.65 with your own equal share when you pay taxes.

If you choose to pay your caregiver's Social Security and Medicare taxes from your own funds, you can follow a different arrangement. Let's say your babysitter makes the same $100 per week as in the previous example. Instead of withholding any funds, you'd pay your babysitter the full $100 each week.

  • For tax purposes, the $100 is still your babysitter's wages each payday. So for each wage payment, you will pay $15.30 (your babysitter's $7.65 plus your own $7.65) when you pay taxes.
  • For income tax purposes, your babysitter's wages each payday are $107.65 (her original $100 plus the $7.65 that you pay to cover her share of the taxes).
  • Paying Federal Unemployment Tax

    The FUTA tax amounts to 0.8 percent of FUTA wages. "FUTA wages" are only the first $7,000 of your caregiver's cash wages during the year (so, yes, there's a cap on it—phew!). The thing about the 0.8 percent FUTA tax is that you must pay it from your own funds. No withholding allowed.
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