The Internal Revenue Service doesn't care who you use as a nanny or babysitter for your kids, but it does take more than a passing interest in what you're paying them.
As in how much. As noted in a recent Accounting Today article, revenue agents don't do much more than yawn if that's a few bucks here and there, but there is a threshold amount beyond which they do indeed sit up and take notice.
That is $2,000 within a calendar year, which the above article notes is the trigger point at which the IRS considers a caregiver for your kids to be a household employee.
That designation yields consequences for a filer or filers paying that caregiver, in the same manner that it does a business distributing paychecks to its workers.
If a nanny or babysitter will earn that much within a year, the payers need to be regularly deducting and withholding at least Social Security and Medicare taxes. Additionally, they need to match those amounts as the employer.
There is also a $1,000 threshold that kicks in withholding and payment duties.
Accounting Today points out that "household employment taxes are actually due throughout the course of the year," which means that family payers will need to be diligent about making required payments to the IRS quarterly.
Of course, there are people who pay out far more than the above-cited threshold amounts to nannies and babysitters annually and do not duly communicate with the IRS.
That is a risk they take. Moreover, and given the relevant laws in place, it is unlawful behavior that can result in fines and penalties.
Various tax breaks may be available in a given case, which can greatly reduce the nanny tax.
Questions or concerns regarding tax rules or treatment pertaining to any subject that can lead to an IRS communication or audit can be addressed to an experienced tax attorney.