If you or an elderly relative is hiring someone to provide care in their home, you should be aware that the “nanny tax” may apply.

Generally, the tax applies if you hire someone and pay them $1,700 or more a year. Here’s what’s involved:

• You must pay the employer’s share of Social Security and Medicare taxes for the employee. That’s 6.2% of wages for Social Security and 1.45% for Medicare.
• You must also withhold the employee’s share of these taxes and pay that, too. The amounts are the same, except that for 2011 the employee’s Social Security tax is reduced to 4.2%.
• In addition to these taxes, you may have to pay a 6.2% federal unemployment tax if you pay someone more than $1,000 in a calendar quarter. You might be able to take a credit against this of up to 5.4%, but on the other hand you might also have to pay state unemployment taxes.
• If asked, you might also have to withhold federal and state income taxes from the employee’s pay.

Sound complicated? It is! But remember that these rules apply only if you hire someone directly. If you pay an agency and the agency pays the caregiver, then you’re off the hook because the agency has to do the paperwork.