From a babysitter who looks after the kids one night a week to an au pair staying with you for a few months, through to a full-time nanny working from the family home, the childcare options available are as varied as families themselves. But no matter which solution suits you and your family best, there’s no getting around the fact that you’ll need to pass some of your hard-earned cash on to your nanny, babysitter, or childminder sooner or later—and as soon as that happens (if not before!), you need to get to grips with the question of taxes. Follow our step-by-step guide and rest easy that the tax office is as happy as your little ones are.
One key question to answer
So, you’ve found the perfect person to provide childcare for you, and you want to get things in order financially. There’s one key question to answer: Are they a contractor or an employee? It doesn’t matter if you want to call them a babysitter, a nanny, a childminder, or anything else—what matters is whether the Australian Taxation Office (ATO) sees them as an employee who’s part of your household or a contractor who functions independently. Why is this so important? Because your tax obligations differ depending on whether you’re paying a contractor or an employee. Incidentally, if you’re hiring a third-party company to provide childcare, like a nanny agency, you don’t need to worry about this distinction: Just pay the fees the company sets, and they handle all the rest.
Employee or contractor: what’s the difference?
You might think that “employee” and “contractor” are basically synonymous—but they’re not. Employees are people who work with tools provided by their employer or are reimbursed by them, and can be instructed to work in a particular way or at particular times. This means that, generally, full-time nannies or au pairs working from the family home would be classed as household employees by the government.
Conversely, an occasional babysitter who isn’t obliged to work for you at set hours would be a contractor. Contractors are required to fulfil a number of criteria, including having an Australian Business Number (ABN). There’s a lot of nuance to this, so the ATO has put together a handy tool for you to check your specific situation. It’s worth getting this right (and seeking advice if you’re not sure): If you falsely treat an employee as a contractor, you could be charged with a “sham contracting arrangement” and end up faced with a penalty of up to AU$ 13,320. Read on if you’ve determined that your childcare provider is an employee—and skip to the penultimate section if not.
Put it in writing: The ins and outs of employment contracts
So, you’ve worked out that your childcare provider is legally an employee. What’s next? You need to protect yourself—and them—by drawing up a proper employment contract. Make sure to cover areas like their duties, their hours of work, their leave entitlement, and their salary. Some of these things are set nationally by the Australian government. For instance, all employees (except casuals), whether full-time or part-time, are entitled to four weeks of paid leave each year—and that includes your nanny or childminder. The same applies to salaries, too. Employees working as a nanny/childminder are covered by the Miscellaneous Award, which currently stipulates a minimum wage of AUD $21.38 an hour. Other things are handled on a state-by-state basis, such as insurance—so it’s worth using a tool (like the Australian government’s contract-drafting tool) to help with this.
Employees: three things to bear in mind
So, you’ve drafted your contract and worked out how much you want to pay your childcare provider. But there’s a bit more to it than that! There are three main kinds of taxes you might need to pay: income tax, superannuation, and fringe benefits tax. Over the next few sections, we’ll take you through them step-by-step.
1. Income tax
If your nanny or childminder is classed as an employee, you’ll need to withhold income tax from the salary payments you pay them—and pay this to the ATO. Here’s how:
- Register to withhold income tax before you pay your employee: Your “PAYG withholding account” can be set up online.
- Have your childcare provider complete a “Tax file number declaration”, which will give you some key information for your calculations.
- Use this tax file number declaration to work out how much to withhold, using the ATO’s calculator to help you.
- Each quarter, complete the statement that the Australian government sends to you and pay the amounts you’ve withheld.
- Each year, complete an annual summary report and send it to the ATO.
- Don’t forget to give your childcare provider a payment summary, detailing the tax withheld!
2. Superannuation
Alongside paying income tax, you might have to pay your childcare provider superannuation, also known as “super”. This money, currently 10.5% of the employee’s earnings, goes into their retirement pot so they can be supported in old age. Sounds complex? Here’s a step-by-step guide:
- Work out if you need to pay super: You need to pay superannuation for every household employee working over 30 hours a week, regardless of how much you pay them.
- Select a default retirement fund for the super to be paid into.
- Give your childcare provider a choice of fund and record that you’ve done this. If they don’t make a choice, you need to request stapled super fund details for them.
- Ask your childcare provider for their tax file number (TFN) and pass this on to the fund.
- Calculate out how much to pay, using the ATO’s calculator.
- Finally, pay the super contribution to the relevant fund—and don’t miss the deadline: Payments are due within 28 days of the end of each quarter!
3. Fringe benefits tax
You’ve withheld and paid your employee’s income tax, you’ve paid their super—think that’s all? But what if you pay for your nanny’s gym membership? Or you reimburse expenses that your au pair incurs for buying books and craft materials for your children? In that case, you’ll also need to pay fringe benefits tax (FBT). Here’s how:
- Work out how much in fringe benefits you’ve paid during the FBT year, from 1 April to 31 March (as ever, the ATO has a guide to help).
- Register for FBT—you can do this online, via phone, or various other ways.
- Keep records of all the things you paid for, like receipts or invoices. You’ll need them to fill out your FBT return and in case there are any questions down the line.
- Depending on the fringe benefit in question, you might need to have your childcare provider write a declaration detailing what they received.
- Once you’ve got all that information, you need to lodge your FBT return by 21 May (whether electronically or on paper). Incidentally, if you’ve registered for FBT but realise you don’t have any fringe benefits to report, you still need to file a “notice of non-lodgment” to prevent the tax office chasing up the return.
- Finally, pay your FBT—either quarterly or annually, depending on whether you paid more than AUD $3,000 FBT in the previous year.
At the end of all that, we’ve got some good news for you: You can usually claim an income tax deduction for the FBT you pay.
Contractors: a more straightforward task
But what if you just have someone babysit your kid once a month or so, when you’re out for dinner? If your childcare provider is classed as a contractor, they’ll handle their own tax affairs, so there’s no need to withhold income tax from anything you pay them. You also won’t have to pay FBT: This doesn’t apply to contractors. But superannuation works a little differently. Because childcare contractors’ work is primarily based around their labour, this means that you still have to pay super if they meet the 30-hour limit. To do so, just follow the steps above.
Found that all a bit taxing? Here’s a summary
When you’ve found the childcare provider of your dreams, you just want to crack on with things—not sit around working out your tax liability. Here’s a quick overview to make sure you’re on the right track:
- Work out if your childcare provider is an employee or a contractor.
- If they’re an employee, think about income tax, super, and fringe benefits tax—and don’t forget to draw up an employment contract.
- If they’re a contractor, superannuation is all you need to worry about.
No matter whether your childcare provider is an employee or a contractor, there’s one last golden rule to remember: Keep records of all your expenses and payments. This helps protect both sides down the line—the ATO recommends keeping these records for at least five years.