If you paid a household employee more than $1,500 in 2006 (the threshold may be higher in 2007), you're stuck with the "nanny tax." You are required to pay Social Security and Medicare taxes on the wages. The combined rate is 15.3% on the first $94,200 of wages.
A special exception, sure to bring a sigh of relief to teenagers who baby-sit or mow lawns and the adults who hire them, exempts workers under age 18. Unless household work is their principal occupation, you don't have to pay social security taxes for them regardless of how much you pay them during the year.
You and your employee share this burden of the tax. The 15.3% rate is supposed to be split evenly, with employer and employee each paying 7.65%. But it's up to you to see that the government gets its money. You can withhold 7.65% from your employee's pay or, as many household employers do, simply pay the full freight. Note that if you pay the employee's share, that amount is considered extra taxable income to the employee.
For example, assume that you pay a child-care provider $5,000 during the year and, rather than withhold Social Security taxes, you pay the full tax yourself. The 7.65% employee share would be $382.50, so as far as the IRS is concerned your employee earned $5,382.50 for income tax purposes. (The value of food, lodging or other noncash benefits—which may count as income to the employee for income tax purposes—is not clipped by the Social Security tax.)
Employers of household help no longer have to make special quarterly payments of the employment taxes. Instead, you'll pay what you owe along with your regular income tax return that's due April 15. A special form—the Schedule H—has been designed to go along with your Form 1040. It's included in TaxCut.
Note this: Any amount you will owe for household help is supposed to be reflected in the amount withheld from your paychecks or in your quarterly estimated tax payments. This means you may have to revise your W-4 form at work—the one that controls withholding—or boost your quarterly estimated payments to cover nanny taxes.