6 household employment mistakes and how to avoid them

Learn how to avoid making nanny tax mistakes

Most people who hire a nanny or senior caregiver are not accountants or HR professionals. But with all the IRS regulations and labor laws you must follow when you take on a household employee, it may often feel like you are one. Without the proper knowledge and information, it can be easy for those without CPA or HR credentials to make mistakes.

 

Don’t worry, we’re here to help. Here are six of the most common household employment errors we see at HomePay, why they're wrong and how you can avoid them.

 

Mistake #1: Giving your nanny the wrong tax 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." This is because Form 1099 is used for independent contractors, not for employees. Independent contractors are self-employed and control the aspects of the job they’re performing.

 

According to IRS Publication 926, caregivers like nannies are considered household employees. Your nanny is your employee because they come to your house during the days and hours you require them to and follow the rules you set for how your kids should be cared for. As an employer, you are required to give your nanny a W-2 to file their taxes, and you must file and pay taxes in accordance with the deadlines set by the IRS and state tax agencies.

 

Read more: Is your caregiver an employee or  an independent contractor?

 

Mistake #2: Not paying overtime

How much does your caregiver work? Household employees are generally considered non-exempt workers, which means federal law entitles them 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 a few states (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 caregiver through your company's payroll

Whether you’re an entrepreneur or own a company, an in-home caregiver is considered your personal employee, not your company's. Yes, it may seem easier to put them on your business' payroll, but it's not allowed by the IRS, which doesn't consider 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 payrolls separate. Instead of paying your caregiver via company payroll and taking a business tax deduction, you should pay them 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

Because most families are used to filing their personal income taxes once per year, they think they can handle household employment taxes the same way. Unfortunately, these taxes work differently. They're filed year-round — generally four times per year with the IRS and quarterly in most states. Follow this nanny tax timeline to keep it all straight and read more about how to pay nanny taxes yourself.

 

Mistake #5: Thinking nanny taxes only apply to families with nannies

The term “nanny taxes” became popular when Zoe Baird, a nominee for Attorney General in the early 1990s, was found to be paying her nanny under the table. However, if you pay anyone $2,100 or more in a calendar year to come to your house to do a specific job at a specific time and follow your rules, the so-called "nanny tax" likely applies to them as well. Senior caregivers, personal assistants, full-time housekeepers and estate managers all fall under this umbrella because you’ve establish a household employer/employee relationship.

 

Read more about your responsibilities when hiring a household employee.

 

Mistake #6: Forgetting to capitalize on tax breaks

When you pay your caregiver on the books, it opens you up to tax breaks. If you or your spouse has access to a dependent care flexible spending account through work, you can pay for up to $5,000 of care-related 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 at Care.com HomePay. "Some families even save money by paying legally because their savings outweigh their tax liability."

 

 

Next Steps:


 
* 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.

5 Comments

Join the conversation

Comment
Placeholder image

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
Photo of Tom B.

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
Placeholder image

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
Photo of Stephanie B.

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
Photo of Sandy S.

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

Leave a comment

You can post a comment by logging in to your Care.com account or continue as a guest below.