6 Common Nanny Tax Mistakes

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Let's face it, 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 others to look after your children or elderly family members, take care of your pets or clean your home, knowing the difference between correct and incorrect information is critical.

Here are some of the most common tax mistakes, why they're wrong and why you need to know the difference.

nanny tax mistakes

Mistake #1: Filing the Wrong Form

"One of the biggest myths is that you can 1099 your nanny," says lawyer Lisa Weinberger, founder of Mom, Esq. "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,” 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 -- though a few states (including California, Maine, Maryland, Massachusetts, Minnesota and New York) have more specific laws.

Learn more about why nannies get overtime and how to handle it.

Mistake #3: Using the Company 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
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 regular dog walker? A weekly sitter for date nights? Does your neighbor's daughter clean your house every week?

If you pay someone more than $1,900 in a year and they come to your house to do a specific job with your supplies (your dog's leash, your cleaning supplies, etc.), the so-called "nanny tax" applies to them as well. Technically, that's a household employer/employee relationship, not an independent contractor, and requires proper tax payment and filing.

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 Stephanie Breedlove, vice president 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?

What do the experts say about nanny tax mistakes? Watch this video to find out.



Tiffany Smith is the senior associate editor here at Care.com. She has written for All You, Time for Kids and the Boston Globe. And as a former babysitter, she knows a lot about fun games to play with kids. Getting them to eat their veggies -- that’s a different story! Follow her on Twitter @tiffanyiswrite.

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* The information contained in this article should not be used for any actual caregiver relationship without the advice and guidance of a professional 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.

5 Comments

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Barbara B.

I'm hiring a summer sitter for 20 hours per week. will probably be less than $1900 for the whole summer. do i have to get an tax ID number and provide with a W2 form? Or is this something she can just claim with her taxes and pay her taxes by herself?
May 05, 2016 at 12:46 PM
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Tom B.

Hello Paola. I'm Tom Breedlove, Director of Care.com HomePay and I can help you with your question. For your summer nanny, you won't be required to withhold taxes from her since she'll earn less than $1,900 for the year. You will need to pay attention to her wages though because once she leaves and the new nanny starts, if you've paid $1,000 or more in the quarter (July - September) in TOTAL wages, you'll owe federal and state unemployment insurance taxes.
May 04, 2015 at 12:34 PM
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Paola C.

I need a nanny for 8 weeks in the summer. She will work only 10 hours/week, and she will be available only in the summer. I am going to pay her less than $1900 in a year, but I will need to hire somebody else for the rest of the year. Do I still have to pay taxes for the summer nanny?
May 01, 2015 at 1:05 PM
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Stephanie B.

Hi Sandy! I'm Stephanie Breedlove, VP of Care.com HomePay and I'll be happy to answer your question. Unfortunately, the answer is yes, you'll be responsible for those taxes. Household employees are not required to have federal or state income taxes withheld from their pay, but considering the family already withholds Social Security & Medicare taxes, I recommend they also withhold these taxes. This way you're "paying" income taxes in small amounts throughout the year rather than all at once during tax time. I'm really sorry to hear that this detail was not communicated effectively between the family and you last year. Moving forward, I would just ask the family to withhold income taxes from you. You can fill out a W-4 for your federal income tax withholdings and an equivalent state W-4 form if you live in a state with income taxes.
March 04, 2014 at 12:19 PM
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Sandy S.

I am a nanny and have been struggling to get my employer to send me my W-2, first I was told by them that they filed a Schedule H (Household) and didn't need to give me a W-2, I then informed them that they deducted taxes from my paycheck, so I needed a W-2, well I now have my W-2 from them and they show no Federal Taxes were withheld, only Social Security and Medicare, I was under the impression from day one that Federal was deducted!! Does this mean "I" will have to come up with Federal taxes to pay the IRS?
February 27, 2014 at 9:07 PM

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