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Schedule H CPA explains the Nanny Tax and provides an example

Even Schedule H CPAs call it the Nanny Tax! If you paid more than $1700 to a household employee , or paid them more than $1000 of gross wages in any calendar quarter, you need to file Schedule H with your IRS Form 1040. Schedule H substitutes for the usual employer IRS tax forms. It sounds strange that Form 1040 calculates more than income taxes. But the IRS just tries to make compliance easier for household employers. It may not seem like it, but Schedule H beats becoming a traditional employer.

Household employees may include:

  • Babysitters
  • Caretakers
  • Cleaning people
  • Domestic workers
  • Drivers
  • Health aides
  • Housekeepers
  • Maids
  • Nannies
  • Private nurses
  • Yard workers

Key differences between Household Workers and Subcontractors

I think any Schedule H CPA would agree that folks generally try to classify household workers as subcontractors. Why? It shifts all the taxes and associated compliance hassles to the worker. The main two issues?

  • Do you control the HOW the work is done?
  • Does the worker use YOUR tools and supplies?

If either answer is yes, prepare Schedule H. And don’t issue a Form 1099-MISC.

Remember, Schedule H and the Nanny tax are closely linked to immigration status. You’re expected to know if your worker is legal to work in the US!

Nanny Tax Mechanics

Like any employer, you can withhold the employee’s share of employment taxes from their gross pay: a total of 5.65% in 2012 – 4.2% for Social Security and 1.45% for Medicare. The employee may request that you with hold federal income tax, but you are not required to do so.

Generally, folks pay a straight hourly wage or salary, and then pay all/both the employee’s 5.65% AND the employer’s matching 7.65% taxes themselves, on Schedule H during Form 1040 tax preparation. The employer also incurs Federal Unemployment Tax (FUTA) of .08% on the first $7000 of gross wages during the calendar year.

Nanny Tax Expense Example

So, if you paid $10,000 to a household employee in 2012, the tax due on Schedule H of Form 1040 would be $1386: $565 for employee’s employment tax, $765 for employer’s employment tax and $56 for federal unemployment tax. Remember you could have withheld the employee’s employment taxes of $565 from their gross pay.

We’re a CPA firm with a virtual office to serve long distance clients. Schedule H isn’t that complex, but we’re happy to prepare it as part of your overall tax preparation. We offer a free phone consult; just call (910) 399-2705.


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