Laura Saunders, a journalist for Wall Street Journal New York wrote “Tax Report: Almost No One Pays the ‘Nanny Tax’ — But many households should probably start; ‘this is like fire insurance.’” Reading the piece from her point of view it is possible to find the advantages of paying “the nanny tax”.

The families that hire household employees and file Schedule H will have many other profits than just more free time. It will be peace of mind, contributions to society, making employees feel more pride so household workers could work hard to earn more money and pay more income taxes to the government budgets needed during a hard time such as Covid-19 that we had in 2020.

Without nanny tax, many household workers would miss out on valuable benefits, such as:

  • Social Security disability where a 12.4% Social Security tax is due on amounts up to $137,700 in 2020. Typically, this levy is split between the employer and a household worker, but some employers agree to pay the whole tax. Once again, the employer is a family that has to work for this money away from their loved ones and a worker is usually a young person looking to make money to support life in college.
  • Medicare tax of 2.9% of wages is also due, typically split between employer and worker. There’s no wage cap.
  • The Earned Income Tax Credit that applies if a taxpayer is single with income between $15,820 to $50,954 and married couples from $21,710 to $56,844 depending on the number of children.
  • A health-insurance tax credit that applies to low-income families or could be provided by an employer.
  • Employers also owe a small federal unemployment tax that will help workers during the time between jobs.

There are more jobs created with mandatory Nanny Tax. For example, a tax agency generally charges about $1,000 a year per employer to do federal, state, and local reporting for domestic help.

An executive with HomePay, Ms. Swope says that people with access to Flexible Spending Accounts for childcare in their own workplace can save up to $2,300 a year in federal and state taxes on payments to household help. Such accounts allow workers to pay child-care expenses with pretax dollars up to $5,000, depending on the plan. If the taxpayer doesn’t have a plan such as mentioned, the Child and Dependent Care Tax Credit may help. It often reduces taxes up to $600 for one child and $1,200 for two or more children.

All of those advantages of filling Schedule H and paying the Nanny Tax could be mandatory and used by most of Americans but they are optional. Ask your accountant how to benefit during tax season.

If you want more information on the Nanny Tax or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.

Written By CPA, Justin Anderson