Why is the nanny tax threshold important
The US Social Security Administration (SSA) recently increased the coverage threshold for domestic workers to $ 2,400 for 2022, from $ 2,300 in 2021, marking the third consecutive year that the threshold has been increased. The amount is set each year by the SSA and is a good reminder to get information from your customers who have or may have hired a household help this year.
Nanny tax threshold
Commonly referred to as the “nanny tax” threshold, any salary paid to domestic workers equal to or greater than this amount triggers Social Security and Health Insurance (FICA) tax obligations for employers and their employees. For domestic workers, the amount changes according to the national average wage index. Income below this threshold is not taxable under Social Security; however, earnings that exceed the threshold are subject to FCIA.
For most industries, there is no threshold of coverage, so every dollar of salary is covered and taxable. Household employment, however, is one of the few industries to have a threshold of coverage. Forgetting this is understandable, but it can cost your customers dearly.
Not just for nannies
While we generally think of domestic workers as nannies, home helpers, housekeepers, and field staff, other workers who can be considered domestic workers include private educators, guardians, and nannies. summer and babysitters with regular hours.
Even if your client only employs a part-time or seasonal worker, the nanny tax threshold may be met. A summer nanny working 40 hours a week at $ 15 an hour will hit the threshold after just four weeks of work. An after-school nanny working 15 hours per week at the same rate will hit the nanny tax threshold just a few months after the start of the school year. If your client has hired a private tutor to supervise or complete virtual learning, the threshold could be met even if the employee only worked a few months in 2021.
It’s important to know if your client hired someone to work in their home in 2021 and if employment taxes apply. However, your client does not have to pay tax on wages paid to their spouse, children under 21, parents or any employee under 18.
Employment-related tax obligations
Social security and health insurance taxes represent 15.3% of an employee’s cash salary. The employer (in this case your client) pays 7.65 percent (social security at 6.2 percent and medicare at 1.45 percent), while the same amount can be withheld from the salary of the employee. the employee, or the family can pay the part of his worker and not withhold.
Keep in mind that taxes paid to cover an employee’s share of FICA should be included in their salary for income tax purposes. They are not counted as Social Security and Medicare wages or as federal unemployment wages.
Most states also follow federal nanny tax rules. These taxes can be remitted quarterly using Form 1040-ES. Another option is for your client to increase their own payroll tax deductions to help cover their household employment taxes that will be due when they file their personal income tax return. Disregarding nanny taxes may result in underpayment penalties.
Unemployment tax threshold
Your clients with household help may also owe federal and state unemployment taxes. If they pay their domestic worker $ 1,000 or more in a calendar quarter, they must pay six percent federal unemployment taxes on the first $ 7,000 of wages. State unemployment taxes vary, but are typically triggered between $ 500 and $ 1,000 in quarterly wages.
Families can get a credit on their federal unemployment tax if they also pay state unemployment. The credit could reach 5.4%, which will significantly reduce the amount owed for federal unemployment.
Outside of a few states (Alaska, New Jersey and Pennsylvania), unemployment is a tax reserved for employers. Wages paid to a spouse, a child under the age of 21 or a parent are not taken into account in unemployment taxes.
Income tax withholding
Another difficulty in the employment of households is the possibility for the employer to withhold taxes from the wages of their worker. While not mandatory, it is highly recommended, as it ensures that the employee is not required to pay their full tax liability when they file their personal tax return.
Reconciling taxes on employment
If the threshold for nanny tax and / or unemployment is met, household employers can reconcile their employment taxes on Schedule H, which is filed with their personal income tax return. The employee receives the W-2 form by January 31. The W-3 form and a copy of the W-2 form must also be filed with the SSA before this date.