Ahh … summer is nearly here. Time to relax and enjoy the sunshine, dip your feet in the ocean and feel a warm breeze blow through your hair…
The serenity is amazing… until you realize that it’s time to go back to the office after maternity leave or your children will need a LOT more childcare now that school is no longer in session. (Only joking, kids!)
Daycare is a great option for many, but a nanny (or nanny share) may be the most convenient (no commute to daycare as he/she comes to you, more flexible schedule) and even the most affordable (especially if you have twins like me!).
However, there are some financial planning considerations to hiring a nanny. A nanny may be considered your household employee in the eyes of the IRS and should be treated as such.
What Is a Household Employee?
According to the IRS, a worker is your employee if “you can control not only what work is done but how it is done. If the worker is your employee, then it does not matter whether the work is full-time or part-time nor that you hired the worker through an agency or from a list provided by an agency or an association. It also does not matter whether you pay the worker on an hourly, daily, weekly or by the job.”
So if you bring your child to a home-based daycare or camp, the person watching your child is not your employee. They are either an employee of someone else or an independent contractor. (This could also apply to housekeepers, private nurses, lawn care, etc).
But if you are a household employer, you should do it “on the books”. (This may be unexpected for those of us who worked as babysitters where it was simply a cash transaction!)
First of all, set yourself up for success by interviewing multiple persons for the job, paying them for a test session to see how they interact with your child, and create a written contract that outlines payment structure, responsibilities, and vacation days. Here is a good resource for more.
As an employer (assuming you pay your employee more than $2,100 in the calendar year), you’ll need to pay FUTA, Medicare, and social security taxes for that employee. These are the “nanny taxes”. When paying these taxes, half may be paid by the employer and half may be paid by the employee. The employer may also choose to pay all the taxes themselves.
To get started, you will need both federal and state tax identification numbers. You can get your federal employer identification number (FEIN) from the IRS and use this number to obtain your state identification number from the appropriate tax agency in your state.
You will need to:
- File a new hire report with the state.
- Calculate your nanny’s gross pay, the taxes withheld from them and your employer taxes each pay period. This is the payroll.
- File state tax returns quarterly, or even monthly depending on your local requirements
- Make 1040 estimated payments to the IRS four times per year.
- Provide your nanny with a Form W-2 by the end of January so they can use it to file their tax return.
- File Form W-3 and Form W-2 Copy A with the Social Security Administration.
- File Schedule H with your federal income tax return.
It starts getting complicated fast, especially if you are busy taking care of a newborn and don’t love filling out forms!
How To Put Your Nanny On Payroll
You can do it yourself, but I find that most parents we know are just not interested in the tedious work needed to calculate taxes and file the forms needed above.
There are people who actually enjoy doing their taxes (some are financial planners like me!), but for most, it is a bit stressful. You don’t want to mess this up, resulting in letters or even penalties from the IRS.
If you use a CPA or Enrolled Agent to do your taxes, you can expect them to file Schedule H with your tax return, but most do not offer the payroll service and quarterly filings needed and listed above. But it doesn’t hurt to ask!
We recommend using a third-party service for your Nanny Payroll taxes for the sake of convenience. Yes, there is a fee, but there is a lot of value in making sure this is done right.
Here are some options (not an endorsement):
Why It Is Important to Do This Right
Your nanny could be a beloved part of your family unit for many years. You need to think about the long-term impact on your nanny and your family.
With you as their employer, they build eligibility for social security benefits, health insurance, unemployment and workers compensation benefits.
During this crazy COVID year, there were parents that realized their nanny could not come to work but were not eligible for unemployment unlike many of their peers. Or parents whose prior nanny did apply for unemployment based on their previous position, resulting in a request for taxes or penalties to the household employer. These situations could have been avoided if the payroll paperwork had been done from the start.
More importantly, however, you can contribute to your nanny’s long-term financial success by putting them “on the books”. Their work history may help them improve their credit score, save for retirement, become eligible for tax benefits, and more.
Disclaimer: This article is for educational purposes. We are not CPAs or attorneys. Please consult the appropriate professional for your situation.
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