Nanny Taxes
Do I have to pay taxes?
If you hired a nanny (or any childcare provider) and the money earned was more than $1500 during the calendar year, you are required by law to report it to the I.R.S (Internal Revenue Service) and pay taxes on it. There are certain situations where the person providing the care may be exempt. This is if the person providing the care is the grandparent of the child(ren), an older sibling or a student that is not solely using the money earned as their sole income; this is most often the case if the student is being claimed as a dependent on someone else's tax return (even if over the age of 18).
top of page
What happens if I refuse to report or pay the taxes owed?
To put it very simply- you could be audited! You would then end up owing more because you would have to pay penalty fees and interest on the taxes.
top of page
I understand I could be audited but how would i get caught?
A great question as most people assume there is no way they would get caught. We have heard of employers (parents) getting caught by a number of ways.
1. You have to fire your nanny and she files for unemployment
2. The Nanny becomes disabled and can not work and then files for social security benefits
3. Either the employer or Nanny file their taxes without telling the other side.
4. Your tax return does not include available tax credits and the IRS may become suspicious (however, if one of the parents does not work-this is not an issue as it will be assumed the parent not working is responsible for the care of the children).
Please Note: There is no statute of limitations for failing to report and pay federal payroll taxes!
top of page
Should I use a tax/payroll company or do it myself?
It is always an option to figure out the taxes and pay them yourself but using a tax company is highly recommended for the following reasons:
1. There will be no mistakes - all taxes will be itemized and paid correctly
2. Any deductions available to you will be maximized to give you the highest return
3. And possible the most important, it will save you an immense amount of time and stress!
There are links to great payroll companies on this page that can help you with your nanny taxes- shop around!
top of page
The cost of paying taxes on a "by paycheck" basis
Taxes need to be paid throughout the year and set aside with each paycheck. A
Nanny can expect to pay approximately 20% of their earnings into the system
and the Family should expect to pay an additional 10% on top of the Nanny's
wages. For example, if your Nanny makes $500 a week, the Nanny nets about $400 for
the week after taxes and the Family pays about $550.
top of page
The itemization of taxes owed and how to figure it out
Employer: The employer (the parents) pay money into their employee's social security,
medicare, unemployment (which is about $350 per year per employee) and may have to pay
into workmen's compensation which varies from state to state.
An example of an itemization: with the situation where your nanny was grossing $500 a week,
you would owe $31 in social security, $7.25 in medicare and $6.73 in unemployment
which comes to $544.98. How did we get these numbers? Using a tax calculator which
is linked below.
Nanny: The nanny must pay money into social security, medicare in addition to federal
and state taxes. For a Nanny that grosses $500 a week, s/he would owe $50.34 in federal
taxes, $31 for social security, $725 for medicare which nets the nanny at $411.41.
You may have noticed that the employer's taxes owed-the social security and medicare taxes
will always match for both because the employer must match whatever the Nanny (employee)
is paying.
For a paycheck calculator where you can easily figure out
how much you need to set aside for taxes, please visit
the nanny4taxes calculator
top of page
Parents: Am I responsible for withholding the nanny's taxes?
No, the Employer (parent) is not responsible for withholding the nanny's taxes. However, if you give your
nanny her full gross wages with the agreement that she will calculate and pay her taxes on her
own and she does not, the employer is liable for both the employer AND employee's portions of
taxes and all penalties and interest. Therefore, it is in the parent's best interest
to withhold all taxes that their nanny owes . It also keeps things simple and it is highly recommended
that as an employer, you do so.
top of page
Our Nanny and Family have decided to pay taxes: what is the next step?
If you've decided to do it yourself without a payroll company- then you will need to fill out a W-4 Form. You can print
one from the link provided or get one from the irs website (www.irs.gov). Next, the parents (employers) will
need an EIN. An EIN is an employement Identification Number. Click How to Apply for an EIN
on how to obtain an EIN. (Getting an EIN is quite simple and can be done over the phone, online, by fax or by mail).
From the first paycheck the employer will want to make the proper deductions using a tax calculator.
When you pay your Nanny, be sure to itemize the deductions in writing with their
paycheck so s/he can keep track.
top of page
When do I need to file my taxes?
The Employer (parents) should file quarterly using Form 941 and the Nanny
can file annually-using the calendar year. The Nanny will need to keep the written itemizations of taxes witheld
for filing at the end of the year. The Nanny may use an online tax filer
to make filing easy. In fact, anyone can file their federal taxes online for free if they make $52,000 or less annually. Click
File Free for more information.
top of page
Are they any tax breaks for parents that do the right thing?
top of page
What is the Child Care Tax Credit?
If you are a parent and you have a childcare attendant (a nanny or babysitter)
that meets the requirements above, you may have heard
about a "childcare tax credit". It provides a tax credit based on a percentage
of your expenses for childcare. However, please keep in mind: The purpose of the tax
credit is not to ease the burden of
the actual cost of childcare but to ease the burden of the cost of paying the
taxes you are responsible for when hiring a nanny/childcare provider for childcare.
There is no financial advantage (for the parents) for having your nanny
pay taxes legally; the child care tax credit is only set up to help "off set" the
cost of paying taxes. So why should parents pay the Nanny Tax? It is simply
in your best interest to do so because the penalties for not claiming (if you
get audited) will be more than the original taxes owed; it is also,
the "right thing to do". It is the right thing to do from a legal perspective
and also the right thing to do for your Nanny as explained below.
What is a Flexible Spending Account?
A flexible spending Account (FSA) is not a specific program for employers with household employees but it is
a great option and can be used to minimize your nanny taxes. An FSA is an account done through your employer
where up to $5000 of your earnings is set aside throughout the year pre-tax (meaning they put the money into the account
on your gross wages not your net! Then, the money in the account can be reimbursed to you for qualified
dependent care expenses. Pre-tax means you will not have to pay federal, social security, medicare or state taxes
on the amount used for childcare taxes. In other words, you are not being double taxed if you use an FSA.
Without an FSA, the parent pays the taxes owed as an employee at their job and then turns around and pays taxes
due for having a household employee. Parents- you should contact your employer as see if you can set one of these up!
top of page
Advantages of being paid legally
There is an advantage for the nanny or childcare provider to claim taxes, especially if
it is the person's sole means of income. Claiming taxes allows a Nanny to pay
into social security, medicare and also be protected in the event of an
accident/injury on the job. It also allows a Nanny to legitimately claim her
earnings which will prove extremely beneficial when opening a bank account and
applying for a line of credit. Imagine trying to get a loan for a car and having
to explain, "No really, this is how much money I make.....". Nannies, by life
profession, should require that they are paid legally for the above stated
reasons. As a parent, you can ease the burden of this process by connecting
with a tax or payroll company that specializes in nanny taxes to do the
taxes for you. A payroll company can help you file using the tax credit
mentioned above or by using a flexible spending account.