How to take the headache out of nanny taxes

You may have found the perfect nanny for your family. Now you need to secure how they will be paid to offer them the position.

Getting nanny taxes correct can become very complicated. The IRS estimates it takes the average domestic household employer up to 60 hours per annum to comply with all the tax, wage, and labor laws surrounding.

Trying to subvert the system and skipping your nanny taxes by paying ‘cash in hand’ shouldn’t be an option. It’s super easy to get caught, and you’ll wind up paying a bucket load in fines, penalties, and back taxes.

Why setting up your nanny taxes the right way is important

You’ll definitely attract a higher-quality candidate by showing upfront you see them as a professional. This will lead to a healthier work relationship, a satisfied employee, and a happier family all round.

Your nanny will appreciate the benefits and protections of being paid legally. They will also have a verifiable income and legal employment history that will help them when applying for a loan or credit card.

They will receive unemployment benefits if you need to let them go due to situations such as COVID-19. And they’ll potentially be eligible for a healthcare subsidy.

Without required workers’ compensation insurance, your employee can sue you for lost wages and medical costs if they get hurt while at work.

Most importantly, you’ll have peace of mind knowing you won’t have to worry about fines, penalties, lawsuits, or audits.

What you need to understand about nanny taxes

Your nanny is considered an employee and not an independent contractor. This is because you control the work to be done, the schedule, and how the work will be performed.

This means you will need to withhold taxes from your nanny’s wages and pay your share of employer taxes.

At the time of writing:

Your nanny pays a total of 7.65 percent in taxes – 6.2 percent for Social Security and 1.45 percent for Medicare. This amount is withheld from their pay.

You pay 7.65 percent of their wages towards Social Security and Medicare (FICA).

If you pay wages of $1,000 or more in a calendar quarter, you pay 6 percent of wages for federal unemployment tax (FUTA) on the first $7,000 in wages. This is paid entirely by you. Withholding from your employee is not allowed.

Nanny Taxes Example

 Paperwork to become an Employer

Form SS-4 Application for Employer Identification Number

Household employers must have an employer identification number (EIN). This will give you a specific tax number for dealing with the IRS and other agencies.

New Hire Report

You must register any new employee with your state within a specific time frame of the hire date.

Unemployment Identification Number

You are required to obtain an unemployment identification number with your state where the work will be performed. This is needed to pay state unemployment taxes every quarter.

Form I-9: Employment Eligibility Verification

Employers need to obtain a completed I-9 for every employee hired in the household. This is used to verify their identity and employment eligibility.

Form W-4 (Employee’s Withholding Allowance Certificate)

An optional form and only filled out if your employee wants you to withhold their tax. It documents how much income tax is to be withheld from your nanny’s salary.

Reporting and Filing Taxes

Form 1040-ES

This form estimates employee federal income tax, employer and employee Social Security and Medicare taxes, and the employer federal unemployment tax.

Form W-2

This form is provided to your employee by January 31 every year. You must file your copy of the W-2 with the social security Administration by the same date.

Potential Tax Breaks for a Family Household

There are a few tax breaks you may be eligible for:

Flexible Spending Accounts (FSA)

This is from your employer who may allow you to make pre-tax contributions to an FSA.

Child and Dependent Care Tax Credit

You can claim up to $6,000 of qualifying child-care expenses, such as your nanny’s pay. This can save you up to $1,200 if you have two or more children.

Now that we have that out of the way, is your head reeling?

It’s complicated, confusing, and time-consuming. It’s easy to see how many people get into trouble with their nanny taxes if they try to do it themselves. Your time is better spent with your family.

There are several services or software plans that can help you out with your nanny taxes. It is sometimes best to pay the extra to get the job done the first time correctly without the headaches.

An excellent service or software should be able to:

Set you up as an employer with the correct paperwork for the IRS and relevant state agency

They automatically process your nanny payroll and calculate deductions and withholding each pay period.

They can file your taxes on time

They keep you compliant with federal and state regulations.

They are the first port of call if the IRS comes knocking.

They prepare your year-end tax forms, including Schedule H, W-2, and W-3

Offer worker’s compensation insurance if your state requires and handle any audits.

Most of the services allow you to do this on a secure online platform.

Supply direct deposit into the employee’s account and access to their pay-stubs and W-2.

Some companies to start looking at for your needs include

SurePayroll – affordable cloud-based option

GTM – complete and comprehensive nanny payroll service

SavvyNanny – affordable and intuitively easy to use option.

Don’t get caught up in the confusing, time-consuming, and anxiety-producing world of nanny taxes. Make it easy by paying the help that will save you time and possible penalties in the long term.

Disclaimer: Nannies & Kids United does not advise on any personal income tax requirements or issues. Use of any information from this site or any other website referred to is for general information only and does not represent personal tax advice either expressed or implied. Many variables can affect your tax issues, and tax laws change frequently. You are encouraged to seek professional tax advice for personal income tax questions and assistance. Some links to professional payroll services have been provided for your convenience.

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