12 Things You Need To Know About the $1,800 Wage Threshold

To make it easier for people to hire household employees for short or infrequent periods of time without having to struggle with the normal tax obligations, the IRS created a yearly wage threshold. When an employer pays a household employee less than the threshold, the employer doesn’t have to deal with many of the typical employer taxes. Although the threshold was designed to simplify nanny taxes, there’s a lot of confusion around how the threshold affects babysitters, summer nannies, and temporary nannies. The facts outlined here will help you understand the law and ensure that you pay your nanny correctly.

1. The IRS household employment wage threshold is $1,800 for 2012. This number may be raised in future years depending on cost of living factors.
2. The wage threshold affects FICA taxes, which include Social Security taxes and Medicare taxes.
3. The wage threshold applies to all household employees including nannies, housekeepers, gardeners, and other people you pay to provide services in your home. The threshold doesn’t apply to independent contractors such as plumbers, construction workers, and others who provide services through a business.
4. The wage threshold doesn’t affect the nanny’s worker classification. It doesn’t matter how little or how much a nanny earns, she’s considered an employee and not an independent contractor.
5. Regardless of whether a nanny reaches the wage threshold or not, she’s considered an employee from the first day of work. As an employee, she’s entitled to labor law protections like minimum wage and overtime from the first day also.
6. If a parent doesn’t pay a nanny more than $1,800 in any one year, neither the parent nor the nanny owe FICA taxes on the money earned. However the nanny does owe and is responsible for paying federal, state, and possibly local taxes on that income. It’s the nanny’s responsibility to keep track of her income and report it on her personal income tax return.
7. Employers aren’t required to provide a nanny who earns less than $1,800 a W-2 form at the end of the year.
8. Because the nanny isn’t required to pay FICA taxes on wages under the threshold, but she is required to pay federal and state income taxes on those same wages, she must report those wages differently on her income tax return. Nannies should get professional tax advice on the correct way to report that income.
9. If an employer does pay a nanny more than $1,800 in any one year, the employer and the nanny are required to pay FICA taxes on the full amount, not just the amount over the threshold. In other words if a nanny earn $1,801, the parent and the nanny must pay FICA taxes on the entire $1,801.
10. The FICA tax liability is divided between the employer and the nanny and is based on the nanny’s gross wages. The employer pays his portion and withholds the nanny’s portion from the nanny’s paycheck each pay period. Timing is important here, and the taxes must be withheld at each pay period. If the employer fails to withhold the taxes, because, for example, he thought the nanny would not reach the wage threshold, he cannot go back to the nanny at a later date and collect her portion. He must pay the full amount himself.  Because of this, it’s a smart practice for employers to withhold all taxes due at each pay period. If the nanny leaves the position before she reaches the wage threshold, the employer can easily refund her the taxes collected.
11. The IRS $1,800 wage threshold relates to FICA taxes only. The threshold for unemployment tax liability is much lower and depends on the employer’s state. This means it’s possible for employers to owe unemployment taxes even though they don’t owe FICA taxes.
12. A caregiver who works as a temp nanny for several families over a long period of time may have a significant amount of wages that fall under the wage threshold. The upside of that is the nanny will owe a lesser amount of taxes on her wages. The downside is that no one is contributing to the nanny’s Social Security fund. Since the amount she collects at retirement or if she’s disabled depends on the amount contributed over the years, earning under the wage threshold for long periods of time can have a negative long term effect on a nanny’s financial well-being.

The wage threshold is one of the most confusing parts of the nanny tax code. However it can save employers and nannies money while simplifying part of the process.

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