Nanny Tax Forms and Procedures: What Are They All About?
Lots of families pay under the table. But is the risk worth the savings? Here's what you need to know.
There are few conversation topics that make parents more squeamish than nanny taxes. Case in point: We couldn't find any moms willing to go on the record about how they handle their nannies' income. The truth is, whether it's because taxes seem too confusing or expensive, there are a lot of families paying nannies "under the table," which is illegal.
But are the weekly savings and lack of paperwork worth the risk? "Taxes aren't optional -- they're the law," says Bob King, founder of Legally Nanny, a law firm in Irvine, Calif. "You can't buy something at Target and say, 'hey I don't feel like covering that sales tax.' And you can't hire a nanny and decide not to pay her income tax." Not only is it illegal (more on that in a minute), but it may also do your nanny a huge disservice, setting her up for a future of trying to buy a car or apply for a mortgage and having no proof of income.
Your nanny is probably the only person who spends more time with your child than you do -- are you comfortable knowing that you're both skirting the law? "One client said, 'if I know my nanny is lying to the government, what will she lie to me about?'" says King.
Here's what you need to know about paying taxes for your nanny:
What Are the Benefits of Paying Taxes?
Financial security for your nanny -- now and in the future. Paying income tax will ensure that your nanny can build a work history, collect unemployment if you have to let her go and qualify for essential government benefits like worker's compensation, Medicare and Social Security payments later in life.
Peace of mind for you. You may think, if you're not running for office, you'll never get caught not paying taxes. But it happens more often than you'd think: "The most common way that people get in trouble for not paying these taxes is when your nanny tries to file for Medicare or Social Security at some point down the road," says Amy Torres, an attorney and nanny success coach at Empowering Resolutions. Adds King: "She'll have to declare what she earned in order to qualify." And when she lists you as an employer, you get investigated.
You don't want to get caught. If you get audited, go through a messy divorce or your nanny reports her income to the IRS (see above), your under-the-table payments can come back to haunt you -- in an expensive way. "You'll be responsible for all of your nanny's back taxes, plus interest," warns King. You may also be subject to penalty fines, the amount of which can vary substantially based on IRS analysis and the severity of the case. "These fines are going up as the government is paying closer attention to household employees," notes Torres. And if you're a lawyer, doctor, or in another profession that is licensed by the state, you may face professional penalties or even lose your license.
How Much Will I Have to Pay?
You'll likely need to withhold around 13 to 20 percent of your nanny's gross wages to cover federal and state taxes (between 1 and 5 percent) as well as Medicare and Social Security (employers are responsible for 7.65 percent, while employees currently pay 5.65 percent -- this might go back to 7.65 percent in 2012), depending on your nanny's income and your own income and tax bracket.
Here's an example: Say you pay your nanny $600 per week ($15 per hour, 40 hours per week), you'll need to withhold the following from her take-home pay:
- Federal Income Tax: $75.77
- Social Security: $25.20
- Medicare: $8.70
- State Income Tax (3.7%): $22.30 (note: we used New York State. Here's where you can find your state income tax rate.)
Total withholdings: $131.97
You'll also need to make the following contributions:
- Federal Unemployment: $4.80
- Social Security: $37.20
- Medicare: $8.70
- State Unemployment: $24.60 (note: we used New York State. Find yours by contacting your state unemployment tax agency)
Total Additional Payments: $75.30
This means your weekly bill comes to $675.30 per week, and your nanny will take home $468.30. Over the course of the year, you can expect to shell out $33,991.30 -- $2,791.30 more than if you paid a flat $600 per week under the table.
Consult the IRS' Household Employers Tax Guide for more details on each of these withholdings.
Doesn't that Mean I Pay More and My Nanny Gets Less?
Week to week, yes. Household employers can't tax deduct employees' wages the way businesses can, so you end up paying the majority of your nanny's salary with your own after-tax income, notes King. And she'll take a hit in her weekly paycheck when you start withholding the government's piece of the pie. So you may need to increase your nanny's salary so that her take-home pay doesn't take as much of a hit (use this nanny tax calculator to run your own numbers).
The Good News:
You can pay with some pre-tax dollars. Ask your employer if they offer a Dependent Care Account (DCA). This lets you set up to $5,000 of your annual income aside before taxes, and then use that money to pay your childcare bill. Reducing your overall taxable income will reduce your overall tax burden, which may help balance out the extra you're paying in nanny taxes, but can get maxed-out if your child is also in a preschool program.
You may qualify for the federal dependent and childcare tax credit. This lets you claim around 20 percent of the first $3,000 you spend on childcare per child. This tax credit, combined with your DCA, can save you about $1850 per year -- meaning you're only coughing up an extra $941 at the end of the day, to pay your nanny's taxes using the numbers above. (Note: If you have one child, you'll have to choose between this tax credit and a DCA.)
Your nanny earns more in the long-term. Think of that extra $75.30 per week as a deferred raise for your nanny -- because she'll be able to collect on it when she files for Medicare, Social Security or unemployment. And she'll probably see a good chunk of what you withhold from her paycheck week to week, too: "Most nannies' salaries are low enough that they'll qualify for the Earned Income Tax Credit and get a decent refund at tax time," notes King. This should provide some assurance to your nanny if she is nervous about how she'll manage with less take-home pay.
How Do I Set Up My Tax Payments?
The most efficient way to pay taxes on your household employees is to sign up with a payroll service like Care.com Home Pay managed by Breedlove and Associates. For a quarterly fee, they'll direct deposit your nanny's paychecks to her bank account, withhold all appropriate taxes and file them electronically. They also have great free nanny tax calculators you can play with to determine how much your nanny will take home at the end of the day.
*The tax information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional tax advisor who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.
You May Also Like:
The world’s most experienced and largest intercultural live-in child care program.
Since 1988, EurAupair has been devoted to assisting families with their child care needs.
Care.com HomePaySM handles your household payroll and taxes without work, worry or risk.
Affordable full time live-in child care for all your kids @ $340/wk. Search for your Au Pair today!
Hire Pediatric Nurses, Pre-School or Special Needs Teachers at $11.30/h incl. health care.
Get a Cash Offer Good for 30 Days! Free Shipping + Fast Payment. Lock in a Risk-Free Offer Today!
Come see for yourself why KinderCare is the place where thinking thrives and friendships flourish.
Insure your non-refundable camp fees with cancellation insurance from A+ Program Protection.