Hiring a nanny can provide much-needed support for families, but it also comes with specific financial responsibilities. One of those responsibilities is the “nanny tax,” a federal requirement that...
The nanny tax refers to the federal and state taxes that employers must pay for household employees. If you hire a nanny and pay them over a certain threshold, you are considered their employer and must withhold and pay certain taxes on their behalf, along with the employer’s share of payroll taxes. The tax mainly includes Social Security and Medicare taxes (also known as FICA taxes), federal unemployment tax (FUTA) and possibly state-level employment taxes. The IRS sets the threshold for when...
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Pros of hiring a nanny ; May be a stable, consistent presence for you and your child(ren) ; Works set hours each week, which means you'll have reliable childcare when you need it ; Provides one-on-one care for your child(ren) in the comfort of their own home
Use this in-depth guide to nanny payroll and household employee taxes to avoid IRS fines and stay compliant with tax law changes. Learn more today.
Table of contents ; How to pay nanny taxes · What household employees need to provide ; Key takeaways · What is the federal tax on a nanny? · What are nanny taxes, and why do I need to pay them? · Can you pay a nanny with a 1099? · What are the tax implications of a nanny share?
Journal Reports: Wealth Management · Financial Planning for Childless Couples · By Dan Yu · February 17, 2017 at 1:03 PM ET
Q:, Do I have to pay employment taxes for my nanny? ; A:, According to the IRS website , if you hire a U.S. citizen in the U.S. that will be paid more than $1,000 per year, yes, you as the employer are required to pay all applicable state and federal withholding taxes. Most nanny salaries will likely be within a taxable range. Employment taxes vary by state and country, so seek appropriate, professional advise from counsel in your state and country. ; Q:, Do I have to pay employment taxes for my Au Pair? ; A:, Not according to the U.S. Department of State Au Pair Program regulations , and the IRS regulations for au pairs , if you hire an international Au Pair that comes to your country on a visa or permit allowing them to work through a government authorized Au Pair Program. Regulations will vary by country, so seek appropriate, professional advise from counsel in your country. ; Q:, Is my nanny a Household Employee or an Independent Contractor? ; A:, According to the U.S. Department of Labor Wage and Hour Division and the IRS , nannies are employees of the family for which they work. The IRS uses a 20-point test to determine which party within the work relationship has the most control. An independent contractor classification is appropriate only when the worker is clearly in control, where she provides her own tools, sets her own hours, determines how the work will be performed, offers services to the general public, the term of the engagement is finite and generally short-term, she is free to engage help or hire someone to take her place, etc. Based on the answers to the IRS test for independent contractors, tax law appears to view most nannies as employees rather than independent contractors. Tax laws vary by country, so seek appropriate, professional advise from counsel in your country. ; Q:, If I hire a nanny, what employee taxes need to be withheld each pay period? ; A:, Since state employment tax rates vary, check your state's employment website and seek professional accounting or payroll assistance. Your employee’s federal taxes may range from 12-15% of gross wages. See the IRS website for details related to Employment Taxes for Household Employees , which may include: Half of Social Security & Medicare (7.65%) Federal income taxes (based on the number of allowances chosen on Form W-4) State income taxes (if applicable, based on the number of allowances chosen on the state W-4) By law, employers are required to withhold Social Security and Medicare taxes from their employee’s salary each pay period. Income taxes are optional, but highly recommended to help your employee avoid a large tax obligation at year end. Note: Au Pairs are generally not subject to Social Security & Medicare taxes since it is expected that they will not retire in the United States. Employment tax laws vary by state and country, so seek appropriate, professional advise from counsel. ; Q:, As an employer, do I need to budget for employment taxes? ; A:, If you or your counsel determines that your nanny is a household employee, then, yes. Household employers can expect to pay the following employment taxes, as published by the IRS for Social Security and Medicare taxes , which may vary, and change without notice: Half of Social Security (6.2%) and Medicare (1.45%) Federal and state unemployment insurance (varies by state, usually 1-3%) Good News! The employer tax obligation can be largely, if not completely, offset by IRS tax deductions for Child and Dependent Care Expenses . Depending on the amount of the annual wages, some families even come out ahead after the tax breaks. To calculate your employer costs, visit the free payroll tax calculator at Breedlove & Associates or call them at 1-888-273-3356 to receive a free consultation courtesy of GreatAuPair. Note: Household employers of au pairs may be exempt from employer taxes. Check with your accountant. ; Q:, Do I have to pay overtime? ; A:, According to the U.S. Department of Labor, household employees are entitled to overtime pay for all hours worked over 40 in a 7-day workweek unless they are Exempt Live-In Employees . Overtime must be paid at 1.5 times the hourly wage. If a household employee is paid a salary, overtime should be addressed in the contract by breaking the salary into two pieces: the regular rate and the overtime rate. For example, an employee and family agree upon a gross salary of $600 per week for a 45-hour workweek. The regular rate for the first 40 hours is $12.63 per hour; the overtime rate for the remaining 5 hours per week is $18.95 per hour; and the total weekly salary is $600. Note: Live-In Employees may be exempt from pay of time-and-a-half for overtime hours. Seek appropriate, professional advice for your particular situation. ; Q:, What are the requirements for vacation, holidays and sick days? ; A:, Generally, paid vacation, holidays and sick days are not required by law. Additionally, overtime is not required for holidays worked. These optional benefits are to be agreed upon as part of the employment agreement. Note: A few municipalities have special laws for paid sick leave. Please call Breedlove & Associates at 1-888-273-3356 to receive an individualized consultation, compliments of GreatAuPair. ; Q:, What is Workers’ Compensation? ; A:, Workers’ Compensation is not a tax; it’s an insurance policy that provides financial assistance for lost wages and medical expenses in the event of injury or illness resulting from the workplace. Every state has a workers’ compensation system, which entitles workers to receive prompt payment of benefits with a minimum of legal formality and expense. In return, the employee gives up the right to sue for any injuries from work-related accidents - regardless of fault. Some states require household employers to carry a workers’ compensation policy and some do not. For more details, courtesy of GreatAuPair, call 1-888-273-3356 or check with your state’s Workers’ Compensation office for details. ; Q:, Are there tax breaks if I offer health insurance? ; A:, Yes. When a household employer contributes toward health insurance premiums, these dollars are not considered taxable income. Neither the employer nor the employee is required to pay taxes on these dollars. Families can choose to pay the healthcare premium directly to the health insurance company or pay indirectly by giving these dollars to their employee in the form of a reimbursement. In this case, the family must keep a copy of a current health insurance card on file for proof of a current insurance policy. ; Q:, Can I run my nanny’s payroll through my own business? ; A:, No, this is illegal. Here’s a simple explanation of the law: All businesses are allowed to take tax deductions on employee payroll. The logic is that employees are direct contributors to the success of the business, and therefore, the owner is allowed a “tax break” on a portion of total payroll to offset some of this expense. A nanny does not directly contribute to a business; therefore, it is illegal for a business to receive any kind of “tax break” on her payroll. A nanny is considered a contributing member of the household; therefore, a family is entitled to take a “tax break” on her payroll as a childcare expense, instead. ; Q:, What is the process for handling payroll and taxes? ; A:, The payroll and tax process can be complicated, so a proffesional tax advisor is recommended to address your particular needs based on the laws and regulations where you live. Here’s a brief overview of what’s involved: Research employment tax and labor laws to understand legal obligations; Register for federal and state tax accounts; Complete and file New Hire Reporting; Identify and calculate taxes to withhold each pay period; Track gross pay, net pay and taxes withheld; Calculate the employer’s federal and state tax liabilities; Prepare state and federal tax returns quarterly and remit the employer and employee taxes; Respond to IRS and state inquiries; Monitor ever-changing household employment tax law. Note: Comprehensive services offered by Breedlove & Associates can make this process simple for a small quarterly fee.
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