We are fortunate to have my mother in law help take care of our son while we work. We give her a monthly stipend for the trouble (and mostly joy of taking care of her grandson) which really only pays for her gas money. She comes to our house daily, takes care of A, helps clean the house and even cooks us food. We’re very lucky.
In preparation of filing our taxes, I have started reading into the nanny tax. Is her monthly stipend considered taxable income? Does she need to report it? Do we have to pay FICA and other taxes? Do we have to withhold taxes?
Here is the scoop on this:
The nanny tax is for three federal employment taxes — Social Security and Medicare taxes (FICA tax) and the federal unemployment (FUTA tax). State unemployment and disability tax may apply as well. Refer to your states tax agency for more information. The nanny tax applies for babysitters working in your home who earned more than $1,700 in 2011. If the babysitter is your parent, spouse, under-age-21 child or someone under age 18 whose principal occupation is not household employment (ex. a student), then you don’t owe the tax
For FICA, the employer (you) pays 6.2% for Social Security and 1.45% for Medicare and the employee (the nanny) pays 4.2% for Social Security and 1.45% for Medicare. FUTA rate is about 0.8% and is due on the first $7,000 of the nanny’s wages for the year — but only if you paid $1,000 or more in any calendar quarter for the current year or preceding year. You are not required to withhold the federal income tax unless you and the nanny agree to do it.
Since our nanny is a parent, then the nanny tax is not due. This rule also applies for our home state of California. We will simply report her income earnings when we file our personal income tax and she will do the same on hers.