Welcome and thanks for your question!
If you pay your nanny more than $1,800 a year, then your nanny is considered a household employee in the eyes of the IRS. You are required to withhold Social Security and Medicare taxes
from a household employees paychecks (currently 7.65%). You will be required to file a Schedule H
with your 1040 individual tax return
to report the wages you paid, taxes withheld, and also employer taxes that you may be required to pay (generally federal
unemployment and FICA taxes). You would need to give her a W-2
each year for the wages you pay her. You will also be required to pay state
unemployment taxes on the wages that are paid to the nanny. You can register with the Minnesota Department of Employment and Economic Development at www.uimn.org.
Neither Minnesota or the IRS requires you to withhold federal and state income taxes
from a household employee's paycheck, but you may choose to do so if your nanny requests it and you agree. In that case, you will need her to complete a Form W-4
so you know how much to withhold. Minnesota requires you to complete an additional registration in order to submit employment taxes to them. You can apply online at www.revenue.state.mn.us
To substantiate the payments made to the nanny, you should pay her using a check, money order, or other type of payment that has a paper trail.
You may also wish to consult the IRS Household Employer Guide
or the Minnesota Household Employee Fact Sheet
for further information. Please let me know if I can provide additional information or clarification on any of the above. Thanks and have a wonderful night.