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You've finally found the nanny of the dreams. Now you can finally enjoy some peace of mind, right? Well, almost. Hiring the perfect nanny is the hardest part, but there's one more important task -- setting up your payroll correctly.

This important step will keep you out of legal trouble, enable you to take advantage of the childcare tax breaks and make sure the person taking care of your children receives professional benefits and protections.

But where do you start? Confusing legal jargon and heaps of paperwork cause many families to hide under the table. Don't worry. You'll be surprised at how easy the nanny tax process can be. Here is our step-by-step guide to creating a nanny payroll account.

    1. Confirm You Are Required to Report
      Before you start the payroll process, you want to be sure you are required to pay the "nanny tax." Some nannies work part-time or unusual hours making many families unsure of their exact legal and financial obligations. The simple approach is to take a look at your nanny's wages. Does it add up to $1,900 or more in a calendar year? If so, you are required to withhold Social Security and Medicare taxes from their paycheck and pay employer payroll taxes.

    2. Talk to Your Nanny
      Paying the "nanny tax" has an obvious impact on your nanny's take-home pay. You'll want to make sure the compensation is defined with both gross and net figures, so your agreement is crystal clear. Take the time to have a candid conversation about how you plan on handling her paycheck, taxes, overtime pay, holidays and other details. We recommend creating at least a simple nanny contract to make your agreement official and avoid future disputes.

    3. Find a Payroll Service
      Yes, you can handle the nanny tax process on your own, but this means an estimated 50 hours of preparing tax returns, performing complex calculations, and studying the ins-and-outs of federal and state household employment tax law. An accountant might also be able to help, but most are not experienced in this highly-specialized area of tax law. Additionally, most accountants are not set up to manage payroll or provide the ongoing support and guidance on labor law issues that most families need

      You may want to check out Care.com HomePay, managed by Breedlove. The service can help families take all the work and worry out of being a household employer by filing the nanny tax payroll for you!

    4. Gather the Necessary Documents
      To set up payroll service, you'll need to pull together certain information about you and also your employee.

      For you, this includes:

      • Your primary contact information
      • Social Security number
      • Federal and state tax information
      • Your employee's compensation
      • Any payroll payments you've made to-date
      • Bank account information
      • If you file "Married Filing Jointly," your spouse must alsprovide their personal information

      For your employee, you'll need:

      • Contact information
      • Social Security information
      • Federal income tax withholding selections
      • State income tax withholding selections
      • Bank account information should they want to be paid through direct deposit.
    5. Verify Worker Eligibility
      If you don't have a payroll service, you'll need to use Form I-9 to verify your employee's eligibility to work in the U.S. The I-9 does not get sent to any government agencies but must be presented to authorities if your worker's employment eligibility is ever questioned.

    6. Set up a Regular Pay Schedule
      Once you and your nanny agree on a pay schedule, stick to it! Determine how often he or she wants to be paid (weekly or bi-weekly) and calculate how much must be withheld each pay period. Make sure your nanny understands what this means in terms of her net salary.

    7. Handle Overtime Correctly
      If you don't use a payroll service, you'll need to make sure to manage any overtime correctly. If your nanny works over 40 hours in a week, you must pay them time-and-a-half for the hours over 40. Live-in nannies generally are not entitled to overtime, but are simply paid for every hour they work (Note: there are special overtime requirements for live-in employees in New York, Massachusetts, Maryland, Maine and Minnesota. Consult your state or Care.com HomePay for details if this applies to you).

    8. File Quarterly Employment Tax Returns & Year-End Documents
      If you handle payroll on your own, you'll need to keep track of the wages paid (and taxes withheld) so you can file state and federal employment tax returns. The state and federal deadlines are different, but generally they are due on a quarterly basis. At the end of the year, you'll provide a Form W-2 to your employee, file a Form W-2 Copy A/Form W-3 with the Social Security Administration, file a state annual reconciliation (most states) and file Schedule H with your federal income tax return.

For an easy way to find out how much you'll be paying in nanny taxes and saving on tax breaks check out our nanny tax calculator!

Your Next Steps:
* 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.

For more tips and advice, check out these Nanny Tax Articles.