Update: In 2014, the Household Employee Wage threshold increased to $1900. This means that any household employee- such as a nanny, housekeeper or elder care worker- earning $1900 or more per year requires their employer to pay what is commonly referred to as the "nanny tax."
Back in 1995, Congress updated tax and reporting thresholds for household employers and made provisions for annual adjustment of the wage threshold that obligates "nanny tax" reporting to keep pace with economic changes.
Household employers will be required to report wages paid to all household employees who are paid $1800 or more in 2012, the first increase in 3 years. Household employers must pay Social Security and Medicare taxes for all household workers who meet this wage test, and issue a form W-2 at year end. The 2011 wage threshold is $1700.
The obligation to pay federal and state unemployment taxes use a different determination to mandate tax reporting that is based on wages paid in a calendar quarter. Federal unemployment taxes are due when wages paid to all household workers (whether they meet the Social Security wage test or not) in a calendar quarter are $1000 or more. State thresholds range from $500 - $1000 of total wages paid in a calendar quarter.
Household employees include nannies, housekeepers, maids, elder care givers, home health aides and other individuals providing personal services in a private home. The IRS and the Department of Labor entered into an information sharing agreement in 2011 as part of an increased enforcement aimed at employers who mis-classify employees such as nannies as independent contractors. When identified, the employers will be subject to civil and criminal penalties, as well as back tax collection activities. The recession has placed state unemployment funds under considerable stress and enforcement and back tax collection activities are a natural consequence as the government attempts to maximize tax revenues collected.