6 Common Nanny Tax Mistakes
If you hired a nanny or caregiver don't get tripped up by these tax mistakes.
Information about taxes and household payroll can be dry and confusing if you're not an accountant. And it's easy to make nanny tax mistakes. But when you pay someone to look after your children or elderly family members, being empowered with the correct information is critical.
Here are some of the most common tax mistakes, why they're wrong and why you need to know the difference.
Mistake #1: Filing the Wrong Form
"One of the biggest myths is that you can 1099 your nanny," says lawyer Lisa Weinberger. "If you issue a 1099, you are not in compliance with the law."
According to the IRS, hiring a caregiver like a nanny puts you squarely in the category of a household employer and she is your household employee. As her employer, you are required to give her a W-2 and file and pay taxes in accordance with the deadlines set by the IRS and state tax agencies.
Read more about What's Wrong with Hiring My Nanny as an Independent Contractor?
Mistake #2: Not Paying Overtime
How much does your nanny work? Household employees are generally considered “non-exempt” workers, which means they're entitled to time-and-a-half for all hours over 40 in a 7-day workweek. And it doesn't matter whether you consider your employee full-time or part-time.
But what about if you have a live-in caregiver? Most states don't require overtime for live-ins, but few states (including California, Hawaii, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York and Oregon) have more specific laws.
Learn more about why nannies get overtime and how to handle it.
Mistake #3: Paying Your Nanny Through Your Company's Payroll
Your nanny is considered your personal employee, not your company's. Yes, it may seem easier to put her on your business' payroll, but it's not allowed. The IRS doesn't see nannies and other household employees as direct contributors to your business. Therefore, these wages can't be reported on a business tax return - and any tax deductions taken on these wages are illegal.
You need to keep the two accounts separate. Instead of paying your nanny through the company payroll and taking a business tax deduction, you should pay her through your personal bank account and take a personal tax deduction on your federal income tax return.
Mistake #4: Waiting Until April 15th to Handle Your Nanny Taxes
This is a common mistake families make. They think they can simply handle any nanny taxes when they do their personal taxes at the beginning of the year. Unfortunately nanny taxes work differently. They're filed year-round, with most state taxes filed quarterly.
Follow this nanny tax timeline to keep it all straight.
Mistake #5: Thinking No Nanny Means No Nanny Tax
That's only true if you don't pay anyone to help you in other ways. Do you have a senior caregiver? A weekly sitter for date nights? How about an after-school sitter?
If you pay someone $2,100 or more in a year and they come to your house to do a specific job at a specific time, the so-called "nanny tax" probably applies to them as well because it's a household employer/employee relationship.
Read more about why nanny taxes aren't just for nannies.
Mistake #6: Missing Out on Tax Breaks
When you pay your nanny properly, it opens you up to tax credits you couldn't receive if you paid her off the books. If you or your spouse has access to a Flexible Spending Account through work, you can pay for up to $5,000 of child care costs pre-tax. The savings can add up to thousands of dollars. And you might also be eligible for the Child Care Tax Credit, which can give you up to $1,200 in tax savings each year.
"Using one or both of these breaks can significantly reduce the cost of being a household employer," says Tom Breedlove, Sr. Director of Care.com HomePay. "Many families even save money by paying legally because their savings outweigh their tax liability."
For more information, check out: Can Our Family Afford Nanny Taxes?