Every January, we’re asked by both nannies and parents on how to file taxes as an employee / employer. A nanny is considered a household employee and should receive a W-2. Many times both nannies and parents find this process confusing. There are some wonderful services out there to help both parties navigate the complicated world of nanny taxes.
Still unsure what you need to do? Our friends at HomeWork Solutions have a wonderful library of resources with all the answers.
TLC for Kids Owner, Stephanie Graff weighs in and answers your questions.
If you are planning to hire a nanny to work in your home and you will be paying her more than $1,700 in a calendar year, you will be required to withhold and pay taxes. These taxes will vary depending on your nanny’s marital status, household income, dependents she is claiming, and the salary you will be paying her. By paying your nanny “on the books” instead of “under the table,” both you and your nanny may take advantage of many benefits and may actually save money in the long run.
As an employer, you are required to pay taxes that usually amount to 10% of your nanny’s gross pay. These taxes include half of the Social Security and Medicare tax (7.65%) and Federal and State Unemployment Taxes.
Employee taxes usually range between 15-20% of the nanny’s gross wages. These taxes are made up of the other half of the Social Security and Medicare tax as well as Federal and State Income Tax. The employer is required to withhold and pay the Social Security and Medicare taxes. The nanny and her employer will decide together whether the employer will withhold the income taxes or the nanny will pay it herself at the end of the year. Most nannies opt for it to be withheld so that they do not have to budget for a payment with their annual federal and state tax returns.
Both nannies and employers may enjoy benefits from following the tax laws. First of all, if you do not, you are breaking the law and therefore don’t have to worry about the large fines and possible tax evasion penalties (Note: the IRS announced in April 2006 that they are beefing up enforcement of employment taxes). Maybe a greater incentive is the financial one. A family paying their nanny legally may take advantage of tax breaks through a Dependent Care Account provided by their employer or through the Tax Credit for Child or Dependent Care. Most companies allow employees to contribute up to $5000 of their pre-taxed earnings to an individual Dependent Care Account. This money is taken out of the employee’s check and reimbursed when a receipt is turned in from the childcare provider. Families can save thousands of dollars a year through a Dependent Care Account. Those who do not have access to a Dependent Care Account may claim the Tax Credit for Child or Dependant Care on their income tax return. A tax credit of 20% to 30% of qualifying childcare expenses may be taken up to $3,000 for one dependent and up to $6,000 for two or more dependents per year.
In your quest for the perfect nanny, you may run into nannies who have been paid in cash in the past and do not realize the benefits of being paid legally. Being legal creates several important benefits:
1. An employment history needed for a car loan, mortgage, student loan, credit card application, future job applications, etc.
2. Upon retirement, legally – paid nannies will receive social security and medicare benefits
3. Unemployment benefits. If you have to lay off your nanny, she may receive up to 50% of her salary for up to six months depending on the circumstances.
4. A single nanny with a child under 19 years old may qualify for the Earned Income Credit, allowing her to eliminate as much as $3,500 of her federal taxes.
As a new employer, tax tables and federal and state tax forms may seem a little intimidating. Luckily, there are tax services specializing in household employment. Breedlove & Associates provides comprehensive payroll and tax services exclusively for household employers. They are the largest and most reputable firm in this industry. Since 1992, they have eliminated paperwork, reduced risk, maximized tax breaks — and generally made life easier — for more than 10,000 families. They charge a flat quarterly fee, ranging from $120 to $180 depending on how automated you want everything to be. There are no long-term commitments and their work is fully guaranteed. Finally, as part of their service, they provide unlimited access to tax and labor law experts so you can always get prompt, professional support and guidance on all aspects of household employment.
With all of the benefits employers and nannies get by being legal, paying illegally doesn’t make much sense. It’s a lot of risk for little reward.
Provided by Stephanie Graff-Yaffee