If you have a household employee, the nanny tax rules apply to you. Essentially, a household employee is somebody that does work in or around your home and is considered an employee. An independent contractor (such as yard maintenance, house cleaners, and the like who have their own equipment and supplies, control how the work is done, and perform similar services for other homeowners) is not your employee and does not fall under the nanny tax rules.
However, if you have a home worker such as a health aide, private nurse or caretaker and you control their wages, hours, and working conditions, they could be considered employees and could subject you to the nanny tax. The employee/contractor relationship is sometimes difficult to determine, so don’t hesitate to seek professional assistance to determine the status of your home worker.
Tax Requirements for Employing Household Employees
If you determine that you do have a household employee, and you paid them $1,900 or more in wages in 2014, both you and the employee are required to pay social security and Medicare taxes (plus any applicable state employee taxes). Also, make sure that you’re in compliance with your state minimum wage laws, local worker’s compensation rules, and that your employee can legally work in the U.S.
If tax withholding is required, you can either do it yourself or engage the services of a payroll processing company. You can use a simplified method to pay the taxes (IRS Schedule H) and file with your personal tax return, but you will still have to deal with state taxes and W-2 forms in an appropriate manner.
Finally, don’t overlook that wages paid to your household employee can be the basis for a tax credit on your personal return for the child and dependent care credit.