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Home › Articles › Money Management › Nanny Taxes

Nanny Taxes

Keeping Clean with the IRS

By Joe Cooke, J.D., C.P.A.

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On January 31, 2007, you give Nan her copy of Form W-2. Since you decided to pick up her portion of FICA, her gross wages are the $10,000 you paid her plus the $765 in FICA you paid on her behalf, for total gross wages of $10,765. The W-2 also reports the amount of federal income tax you withheld, along with any state income taxes withheld.

On February 28, 2007, you send a copy of Nan's Form W-2 along with a Form W-3 transmittal to the IRS. At this point, you owe the IRS $2,510 (the $900 in withholding, the $1,530 in FICA and the $80 in FUTA).

When you file your 2006 income tax return on or before April 15, 2007, you will include Schedule H, reporting Nan's gross wages and the total amount of FICA and FUTA taxes and withholding for the year. The total employment taxes and withholding due of $2,510 is added to your income taxes, increasing the amount you owe or decreasing your refund. If you did not have enough tax withheld from your own wages during the year, you may end up owing a penalty for underpayment of estimated income taxes.

One bit of good news: If your hiring of a nanny is work-related, you may qualify for the child and dependent care credit.

Earned Income Credit
One more wrinkle: If your nanny does not request withholding, you must notify him or her about the earned income credit. Eligible employees who expect to qualify for the earned income credit can get part of their credit in advance through decreased withholding and FICA charges. However, they must fill out a Form W-5 and give it to you in order to get the advanced credits.
 

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