Choices for childcare are not only challenging, but they can be expensive. If one parent stays home, the family can save money in the short-term. Still, the non-working parent loses wages, work opportunities, and future social security benefits. There are so many factors to consider.
If you’ve decided to explore the in-home care options such as getting a babysitter or nanny, then you are going to be an employer. Yes, I know that conjures up images of mansions, manicured gardens, and a life of luxury travel.
But everyday people are hiring nanny’s to help out with their childcare needs so they can continue working.
But when you turn into an employer, there are certain obligations you need to fulfill, and one of those is paying taxes on your nanny’s income. If you’ve never been an employer, this can be downright scary and confusing. No one wants to get it wrong. The consequences can be dire for you and your nanny.
Many people decide to pay for their childcare providers in cash to avoid tax, but there are so many reasons this can get you into trouble. Doing this also puts your nanny at a disadvantage. You put yourself at risk of being sued if your nanny gets injured at work. You don’t get to earn a tax deduction for your childcare. You have a constant fear of being audited and “put into the authorities” for tax evasion.
It’s best to do it correctly the first time to decrease the likelihood of large penalties in the future.
The hardest part of the process is finding someone you implicitly trust to look after your child. Then the rest is just paperwork.
We need to discuss nanny tax calculators, so you don’t get into deep water with the IRS! But before we start, make sure you have all the forms filled out.
Employer Forms
Employer Identification Number (EIN)
This is the number you’ll have to use to pay taxes associated with your nanny. You can apply online and instantly download your approval letter and get your EIN.
State Unemployment Taxes
States vary with the rates and rules, so you need to check with your local state department of labor. You can register online in most states using your EIN. But you may have to wait for your assigned tax rate to show up by mail.
Employee forms
Form I-9, Employment Eligibility Verification
Your nanny fills out Form I-9, and you keep it on file for three years after you have hired them, or one year after they stop working for you. If they leave after one year, you still must retain her I-9 for another two years.
Form W-4, Employee’s Withholding Allowance Certificate
You’re not required to withhold federal income taxes, but if your employee wants you to, they must complete the Form W-4.
Whether you pay your nanny every week, bi-weekly or monthly, you’ll need to calculate their gross and net wages on payday. After depositing your nanny’s wage, you should email a paystub. It’s advisable to have an overview of the hours worked, taxes withheld, and gross and net income.
The process should look something like this:
- Add up the hours your nanny has worked during the previous payroll period.
- Multiply the number of hours by the hourly wage. This is the gross wage.
- Calculate social security and Medicare taxes. You and your employee each pay 7.65 percent of gross wages.
- Subtract your employee’s share from her gross wages and record the amount you owe.
- If your nanny requested you to withhold federal income taxes, you could use the income tax withholding tables. It is best to use a nanny tax calculator for this as it can be quite complicated.
- Calculate your state unemployment taxes if applicable.
- Calculate the federal unemployment taxes (FUTA). Only the employer pays FUTA on the first $7,000 of your nanny’s annual wages. The current rate is six percent, but you may be eligible to receive a credit if you also pay state unemployment taxes.
The federal taxes must be paid online through The Electronic Federal Tax Payment System (EFTPS). Be sure to keep in the know about the deadlines, because the late fees are hefty.
If you are concerned about miscalculations, there are some online nanny tax calculators you can check out. All you have to do is fill in the figures and information requested, and the computer does the rest. Some even prepare payment stubs for you to email or print for your nanny. These nanny tax calculators are usually free. Here are a few online nanny tax calculators to start your research.
Paying nanny taxes can seem intimidating at first. But once you get the paperwork sorted, you can more or less put the process on automation. Especially if you pay your nanny the same amount every week.
Disclaimer: Nannies And 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.
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