Suppose you hire a household employee and agree to pay him or her cash wages of $100 per week.  Because you expect to pay your household employee $1,500 or more for the year, you are required to withhold and pay FICA (Social Security and Medicare taxes) on these wages. You decide to pay your household employee's share of FICA taxes from your own funds, and, accordingly, you do not withhold any Social Security or Medicare taxes.  For each wage payment of $100 to your household employee, you will ultimately owe the government $15.30: your household employee's $6.20 Social Security tax plus $1.45 Medicare tax , and your $7.65 share of the same taxes.

       

For income tax purposes, your household employee's wages each pay day are $107.65 ($100 plus the $7.65 share of Social Security and Medicare taxes you will pay on your household employee's behalf).  Federal income withholding tax will be calculated on the basis of $107.65 in cash wages, not $100. NannyPay also assumes that for state income tax purposes, your household employee's income will be $107.65.