In 2019, the Social Security Administration announced that the 2020 nanny tax threshold would increase by $100. That increase brings the coverage threshold to $2,200. The federal government requires household employers to pay the nanny tax. This specific tax pertains to people who work in a home setting with a prescribed set of duties determined by the homeowner. Household employees are usually nannies, caregivers, or housekeepers. This tax applies to household employees whether the pay period is set monthly, weekly, daily, or hourly.
Who Pays the Nanny Tax?
A household employee that makes $2,200 or more in cash wages during the 2020 tax year must pay Social Security and Medicare taxes. These Federal Insurance Contribution Act (FICA) taxes, often called nanny taxes, are paid by both the household employee and household employer. Typically, half of the tax payment is taken out of the employee’s wages. The employer pays the other half. It is possible that employers will cover all the tax payment without involving the household employee. If someone employed in a household earns less than $2,200, then the 2020 nanny tax threshold does not apply.
To that end, the 2020 nanny tax threshold does not apply if the household employee is a spouse, parents, a child under 21, or an employee under the age of 18. Household employment is a unique field in that it has a coverage threshold at all. In many lines of work, employees and employers are required to file taxes on all wages.
The IRS uses the national average wage index to determine changes in coverage thresholds. The 2020 nanny tax threshold increase is reflective of national trends. It has given $100 worth of more leeway for household employees who work in a household for a short period of time, like a summer nanny or temporary senior caregiver. However, even short-term household employees can often hit the coverage threshold for taxes.
Consider a Household Employee Payroll Software
Whether the employment period is short- or long-term, employers might have difficulty keeping track of household employees’ wage and tax documents. The W-2/1099 Filer and nanny payroll software from Advanced Micro Solutions offers organizational relief to household employers. These programs allow employers to manage household employee wages and tax requirements.
Each household employee that meets the coverage threshold should receive a W-2 form or 1099 form from their household employer at the end of the tax year. Employers should also withhold federal income taxes from household employees’ wages throughout the tax year to prevent large tax bills or penalties.
We know that household employee arrangements to be casual, and many employees are paid in cash. Filing taxes for household employees can become complicated because this industry operates within the home and is therefore difficult to regulate. But employing someone for even a short time can incur nanny tax compliance. This is true even with the increase of the 2020 nanny tax threshold.
Household employees often play a vital role within the home. Keep household employee wage and tax information organized to ensure the success of that integral working relationship. Advanced Micro Solutions’ tax software makes the personal matter of household management that much easier.