Understanding Payroll and Taxes for Domestic Staff

Welcoming a nanny or housekeeper into your home is an exciting step for any family, but it also comes with responsibilities—especially when it comes to payroll and taxes. At MoniCare Nannies, we understand that navigating the financial aspects of domestic employment can feel overwhelming. That’s why we’re here to break down the essentials, ensuring you feel confident in your role as an employer.

1. Employee Classification

First, let’s clarify: your nanny or housekeeper is typically classified as an employee, not an independent contractor. This distinction is crucial because it dictates how you handle payroll taxes and benefits. If you control how they do their work, such as specific hours and duties, and provide the tools, work environment, and resources, they’re an employee. This means you’ll need to manage their payroll and taxes accordingly.

You will likely need to pay taxes if you employ someone to work in your home and they make $2,700 or more in gross wages in 2024 (or $2,600 in 2023). Household employees may include:

• Full- and part-time nannies, housekeepers, house managers, etc. (live-in and live-out)
• After-school nannies and tutors
• Seasonal and summer nannies

Nanny taxes is the collective term used for the employer taxes a family needs to pay when they have a household employee. A family will owe Social Security and Medicare taxes (commonly called FICA taxes), as well as federal and state unemployment taxes, while withholding their employee’s share of FICA taxes. Withholding income taxes is optional, but a good idea so your household employee does not owe their entire tax obligation when they file their tax return.

2. Payroll Taxes Explained

As an employer, you’re responsible for withholding certain taxes from your employee's wages and contributing to others. Remember to account for these expenses (generally 22% to 30% above the employee’s salary) when coming up with a pay range for your employees. Here’s a quick rundown of what to expect:

·       Social Security and Medicare Taxes: As of 2024, you’ll withhold 6.2% for Social Security and 1.45% for Medicare from your employee’s gross wages. As an employer, you also contribute an equal amount, totaling 12.4% for Social Security and 2.9% for Medicare.

·       Federal Unemployment Tax Act (FUTA): You’re required to pay a federal unemployment tax of 6% on the first $7,000 of your employee’s wages. However, if you pay state unemployment taxes, you may qualify for a credit that can reduce this rate to as low as 0.6%.

3. State-Specific Considerations

In addition to federal taxes, you’ll need to comply with state requirements. In Illinois, for instance, you must pay state unemployment insurance taxes. It’s essential to check with the Illinois Department of Employment Security (IDES) for the latest rates and regulations, as these can change.

4. Filing Taxes and Reporting Wages

Keeping track of taxes doesn’t stop at payment. You’ll need to file several forms throughout the year. Here are the forms as of 2024:

·       Form W-2: By January 31, provide your employee with a W-2 form that summarizes their earnings and the taxes withheld. This is essential for their tax filings.

·       Form 941: This quarterly form reports the wages paid and taxes withheld, ensuring you stay compliant with federal regulations.

·       Form 940: This annual form is used to report your FUTA taxes, ensuring you’ve fulfilled your obligations.

5. Consider Using a Payroll Service

Feeling overwhelmed? You’re not alone! Many families opt to hire a payroll service specializing in household employment. MoniCare is pleased to partner with GTM Payroll Services to assist our clients with household employee tax questions. As the top payroll and tax firm in the country, GTM provides courteous knowledgeable guidance on all tax-related questions.

As a MoniCare client, you are eligible for a complimentary, no-obligation phone consultation. Call GTM Payroll Services (800) 929-9213

6. Educate Your Employee

Lastly, it’s important to keep your employee informed. They need to understand their tax obligations, including filing their income tax returns each year. Providing them with a copy of their W-2 form at year’s end is crucial for their records. You may also need to explain their net income after taxes compared to their gross income before taxes.

Understanding payroll and taxes for your nanny or housekeeper doesn’t have to be daunting. At MoniCare Nannies, we’re here to support families in every aspect of domestic staffing. If you have questions or need guidance, don’t hesitate to reach out. Happy hiring!