When hiring home help, beware of the ‘nanny tax’

If you’re hiring a regular babysitter to work in your home, or an elderly relative is hiring someone to provide home care, you should be aware that the “nanny tax” might apply.

Generally, the tax applies if you hire someone and pay them $1,700 or more a year. Here’s what’s involved:

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  • You must pay the employer’s share of Social Security and Medicare taxes for the employee. That’s 6.2% of wages for Social Security and 1.45% for Medicare.
  • You must also withhold the employee’s share of these taxes and pay that, too. The amounts are the same, except that for 2011 the employee’s Social Security tax is reduced to 4.2%.
  • In addition to these taxes, you may have to pay a 6.2% federal unemployment tax if you pay someone more than $1,000 in a calendar quarter. You might be able to take a credit against this of up to 5.4%, but on the other hand you might also have to pay state unemployment taxes.
  • If asked, you might have to withhold federal and state income taxes from the employee’s pay.

Sound complicated? It is! But remember that these rules apply only if you hire someone directly. If you pay an agency and the agency pays the employee, then you’re off the hook because the agency has to do the paperwork.