Let’s start with a basic definition. In most cases, if the nanny works in the families home according to their schedule and rules, the nanny is a household employee. If the nanny works from their own home and sets their own work conditions, the nanny is an independent contractor. You can read more about that here.
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...
If your wife has not been classified correctly, she may need to think about whether she wants to continue working for a family that is not following the correct tax laws.
As a household employee, the family is not required to withhold federal or state income tax is but they are required to withhold and pay Social Security and Medicare tax, although in this case it is called “household employee tax.“ they must report household employee wages and pay these taxes on their tax return. For every $100 of employee wages, they must pay $15 of household employee tax, this is equivalent to the 7.65% employee share of Social Security and Medicare, plus the 7.65% employer share of those taxes. Sometimes, the family will withhold the 7.65% employee share so for every $100 of gross earnings, your wife would take home $92.50. The family is not required to do this, but they have to come up with the same 15% at the end of the year. If they withhold these taxes, their net cost for $100 of labor is $107.50. If they don’t withhold the tax, their net cost for $100 of labor is $115.30.
The family is required to issue a W-2 to their household employee by January 31 that would list the gross income and the Social Security and Medicare tax withheld and paid. If your wife is a household employee, you only have to worry about income tax because the Social Security and Medicare tax were taken care of by the family. Federal income tax will be 12%, 22%, or 24% for most married families depending on your income level. You will also have to plan to pay state income tax which is 3 to 10% depending on which state you live in.
If your wife is an independent contractor, then she is responsible for federal and state income taxes and also self-employment tax. Self-employment tax is about 15% and represents both the employee half and the employer half of Social Security and Medicare, because in the case of a self-employed person they are both the employee and the employer. Self employee tax is 15% on net income after expenses. If your wife provides care in her home, she can deduct part of the household expenses under the home office deduction as business expenses. She can also take a deduction for food that she provides to the child.
because of the 15% self-employment tax, your wife’s total tax bill will be between 30% and 45% of her net income after expenses.
No matter whether your wife is a household employee or an independent contractor, she will have to make quarterly estimated tax payments to the IRS. These payments are due April 15, June 15, September 15, and January 15. The tax system is pay as you go, and if she does not make a quarterly estimated payments to cover the income earned during those quarters, she can be assessed a late fee even if she pays in full at the end of the year.
