Payroll tax, often referred to as the "nanny tax", may be required for home care and other personal assistants. IT'S EASIER than you think to get stuck owing the "nanny tax." Did you pay a homecare worker more than $1,400 in 2004? (The figure is also $1,400 in 2005.) Well, unless that homecare worker is your parent, spouse, under-age-21 child or someone under age 18 whose principal occupation is not household employment (a student, for example), then you owe the tax. The nanny tax is actually shorthand for three federal employment taxes — Social Security and Medicare taxes (together referred to as FICA tax) and the federal unemployment, or FUTA, tax. You will probably also owe state unemployment tax and perhaps state disability tax as well. You can contact the appropriate state agency (listed in IRS Publication 926) and find out what's required. The FICA Tax Rules FICA tax is the biggest nut — it totals 15.3% of wages. Technically, the employer (you) and the employee (the nanny) each owe an amount equal to 7.65% of the wages, for a combined tax hit of 15.3%. You can withhold the nanny's half from her paychecks (like your employer does at work), but few people actually do this. Most simply pay the nanny a cash wage without any withholding. When this happens, you must pay the entire 15.3%. The FUTA Tax Rules FUTA is due on the first $7,000 of the nanny's wages for the year — but only if you paid $1,000 or more in any calendar quarter for the current year or preceding year (2004 and 2003 respectively, if you are filling out your 2004 return). And only if that nanny is not your parent, spouse or under-age-21 child. The good news is that the FUTA rate is only 0.8%, assuming you paid the state unemployment tax you owe by April 15 of the following year. If you don't, the FUTA rate jumps to a hefty 6.2% of wages. Federal Income Tax Withholding Federal income tax (FIT) withholding is required only if you and the nanny agree to do it, and the nanny gives you a Form W-4. This is unusual, so we won't bore you with any details. Paying the Taxes and Filing the Paperwork Any FICA and FUTA taxes on the nanny's wages are simply treated as part of your personal tax liability for the year. They are calculated and reported using Schedule H (Household Employment Taxes). The tax amounts are transferred from Schedule H to the appropriate line on page two of your 1040 and the completed Schedule H is then filed with the return. Calculating what you owe isn't easy. That's because technically the nanny's "wages" include the withholding that you haven't taken from her paycheck. So you need to add 7.65% to the nanny's cash wages to get her taxable income. Our SmartMoney Nanny Tax calculator makes filling out Schedule H easy. Just enter what you pay your nanny weekly, and it will figure your tax bill. If your nanny tax bill is large, you should be aware that the IRS will charge an interest penalty if your taxes turn out to be underpaid because you didn't take the nanny tax liability into consideration. You can avoid the penalty by paying your nanny tax as you go, via extra withholding from your salary or bigger quarterly estimated payments. So make plans to get that nanny tax covered one way or the other. Employer ID Number and Form W-2 Are Usually Required If you owe any FICA or FUTA taxes (or if any federal income tax was withheld from the nanny's wages), you need an employer ID number (EIN). Get one ASAP by filing Form SS-4. You must then give your nanny a Form W-2 and file a copy with the government (along with Form W-3). See the Nanny Tax calculator for help filling out Forms W-2 and W-3. How to Get IRS Forms You can order free copies of Form SS-4, Form W-2, Form W-3, and Schedule H by calling (800) TAX-FORM. While you're at it, order IRS Publication 926 (Household Employer's Tax Guide) as well. It answers some questions not covered in this article. You can use your computer to download Form SS-4, Schedule H, and Publication 926 by accessing the IRS Web site. (In case you were wondering, the IRS accepts only nonreproduced versions of Forms W-2 and W-3.)

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