What the Nanny Tax Is
What is commonly referred to as the "Nanny Tax" is pretty simple actually; it's the employer's share of social security and medicare tax on wages and the employee's social security and medicare taxes you witthold from their pay. When you hire a nanny (or other household worker such as someone to take care of your elderly parent,) you are their employer; you control their time and space and as such, you are required by law to pay the tax. The other part of the nanny tax is federal and state unemployment insurance. Check with the employment department of the state you live in for further details. The first step in paying the IRS is to get EIN number (Employer Identification Number, easiest way to apply is online, at https://sa1.www4.irs.gov/modiein/individual/index.jsp .)
To try to make this a little more understandable, say you have a nanny that you pay $1000 a month. The social security and medicare rate is a total of 13.3 percent, 7.65 percent is the employer's share and 5.65 percent is the employee's share (as of this writing it may go to 15.3 percent in 2012.) The taxes that need to be paid on the $1000 would be $133. You, the employer, pay 7.65
percent or $76.50 and the rest, $56.50 is withheld from the nannies wages. You can then pay the IRS with a schedule H when you file your personal tax return. if you are filing your own taxes, the software program you use should have the form or you can download it at www.IRS.gov. (the form for 2011 will not be available until sometime in January.) If you have a professional doing your taxes they will have the form.
Because of the amount of this tax, t o make the bite a little easier, you can pay the taxes quarterly with estimated payment vouchers, Estimated tax payments may also be nessessary to do because if owe more than $1000, you will have an underpayment penalty. Another option for payment to the government, is if you have a business where you already pay payroll taxes you can pay the nannies payroll taxes under that businesses EIN number.
If your nanny also wants you to withhold income taxes you can do that also by following the withholding tables. As mentioned above there are also various state taxes to pay so we strongly suggest you call the Employment Department of the state you live in to see what is required for domestic employers.