Have a nanny? Make sure your taxes are submitted right

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Most working parents need to make the important decision of who will take care of their child all day when they are at work. In some cases families are a big support but most times it’s deciding between daycare and a nanny. My friend chose to get a nanny as it provided the option of having personalized attention for the baby and not having to deal with the challenges of drop off and pick up with her and her husband’s demanding work schedules. Hiring a nanny worked well but in a conversation about what they were doing about the administrative duties I realized most people are not sure of how the situation needs to be treated in the tax world.

Are nannies household employees?

Yes! Most people want to consider their nannies as an “independent contractor” to avoid costly payroll taxes and other administrative duties and paperwork that comes with it. Nannies are household employees per the IRS, which means there are administrative and tax responsibilities that need to be fulfilled as employers. Form 1040 – Schedule H is very clear regarding this. it has instructions on what documentation is needed, records to be maintained and kept,  the legal status of the employee to work in the US, Employer Identification Number (EIN), taxes to be paid and forms to be filed.

Payroll taxes and other responsibilities

All household employers, like any other employer, are responsible for payroll taxes. This will entail withholding payroll taxes from the nanny’s paycheck, and remitting those taxes along with the employer portion of the payroll taxes. The employer portion of the payroll taxes include Social Security taxes (FICA) and Medicare 6.2% and 1.45%, respectively, as well as SUI- State Unemployment insurance and FUTA- Federal Unemployment Tax Act which is 6% on the first $7,000.

The nanny will need to be provided a W-2 every year and the employer will need to file a Form 1040, Schedule H (assuming the payment to the nanny was $1,800 or more during the year or $1,000 or more in any calendar quarter).

Other Benefits provided by the employers

It is not required to provide health insurance to nannies. Nor are other benefits like vacations, paid sick time or retirement savings plans mandatory. Families may still need to consider insurance, vacations, sick days and bonuses to get the best talent and keep employees happy in a competitive marketplace.

Can this be hassle-free?

This conversation can deter most parents from hiring nannies and be willing to send their kids to daycare. But it need not be the case. All of these things including finding the perfect nanny can be done from the comfort of one’s home.

  • Finding the perfect nanny. Most nanny agencies will help in finding the perfect fit and also take care of the administrative duties as well. A better and more efficient solution can be using a service like care.com to find the perfect nanny where you would be able to specify the criteria and have a broader selection than most agencies.
  • Payroll services. There are a number of inexpensive payroll services that can be used to pay your nanny. For the most part, you will need to specify the hours worked and the rate per hour and the payroll provider will calculate the taxes and let you print a pay stub. Some will also let you make a direct deposit to the nanny’s account if the nanny prefers that over a check.
  • All these services will help you pay the taxes and prepare a W-2 and the Form 1040 schedule H and any other forms needed depending on the state you are in.
  • Dependent Care Flexible Spending Accounts. Most employers will provide a flex spending account for Dependent Care. You can defer up to $5,000. This is deducted tax free from your paycheck and thus saves you money. If you’re in the 28% tax bracket, deferring $5,000 will save you $1,400.

Trusting someone to take care of your little one is never an easy task and making the right choices is important. For my friend, finding a nanny who took care of her son was more expensive than daycare, but I feel it was one of the best decisions she made.

Creative Commons image by Stephan Geyer.