The "Nanny Tax" rules can be confusing. The core issue is whether your household worker is an employee or an independent contractor.
The Independent Contractor Argument
Under Section 530 of the Revenue Act of 1978, a taxpayer is not liable for employment taxes if they have a "reasonable basis" for treating the worker as an independent contractor. Factors supporting this classification include:
- The worker sets their own hours.
- The worker provides services to multiple families.
- The worker is paid by the job, not strictly by the hour.
- You do not provide step-by-step instructions on how to do the work.
Why It Matters
If they are an employee and you pay them over the threshold (indexed for inflation, was $1,000/year in 1996), you must withhold Social Security and Medicare taxes and pay the employer's share. If they are a contractor, you do not withhold, though you may need to file a 1099-MISC if payments exceed $600.