When you hire a nanny or senior caregiver, you become a household employer — and that means you have to have a base knowledge of taxes, payroll and human resources. Of course, not everyone studied those topics in school or work in those fields. So to help you navigate this new endeavor of managing a household employee, we’ve broken down eight of the most frequently asked household employment questions we hear from families.
1. Is my caregiver a household employee or an independent contractor?
With very few exceptions, the IRS views in-home caregivers like nannies and senior caregivers to be employees. This is because you control when, where and how the work is being done. Household employees must be given a W-2 to file their personal income tax return whereas independent contractors receive a Form 1099 at the end of the year. Misclassifying your employee as an independent contractor is a form of tax evasion and has expensive, time-consuming consequences.
Read more about why a caregiver working in your home is classified as your employee.
2. What are my tax obligations as a household employer?
The IRS says you’re required to withhold and pay certain taxes if your employee earns $2,700 or more from you throughout the year. The taxes you’re required to pay are:
Social Security taxes.
Medicare taxes.
Federal and state unemployment insurance taxes.
You’re also required to withhold the following taxes from your employee’s pay:
Social Security taxes.
Medicare taxes.
Federal income taxes.
State income taxes (if you live in a state with income taxes).
It’s possible that your state could also require an additional tax to be withheld from your caregiver or paid by you. Check out the requirements in your state.
3. Are there any tax breaks I can take to save money?
Yes. There are two tax breaks potentially available to you:
- Dependent Care Account: This is a type of flexible spending account (FSA) offered through most companies where you can set aside up to $5,000 tax free. You can use the funds to pay for your nanny’s wages without factoring in any taxes. Families will save approximately $2,000 by utilizing a Dependent Care Account.
Child or Dependent Care Tax Credit: When you file your personal income tax return, you’ll fill out Form 2441 to itemize up to $3,000 in expenses if you have one child, and $6,000 if you have two or more children. Most families will save 20% on these expenses ($600 for one child and $1,200 for two or more children).
If you have two or more children, you may be able to capitalize on both tax breaks. You would use the full $5,000 on your FSA and then put an additional $1,000 on Form 2441. This combination will save you an additional $200. To qualify for each tax break, your children must be under the age of 13 and both you and your spouse must be working or attending school.
4. Are there any tax benefits if I offer health insurance to my caregiver?
Yes. If you contribute toward your employee’s health insurance premiums, these dollars are not considered taxable income. Therefore, neither you nor your employee has to pay taxes on this compensation. This setup only works if you have one nanny though. If you have multiple employees, you’ll need to look into either an Individual Coverage Health Reimbursement Arrangement (ICHRA) or a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) instead.
Learn more about contributing to health insurance for a nanny or senior caregiver.
5. Do I need to provide paid vacation, holidays and sick days to my caregiver?
Federal law does not require that you give paid time off to your household employee for vacation, holidays or sick days. However, your city or state may have special requirements for paid time off that you’ll need to comply with. Regardless of the law, most families offer some paid time off benefits in order to attract and retain a quality employee. These details should be included in the employment contract you create for your caregiver.
6. Do I need to pay overtime?
According to federal law, household employees are entitled to overtime pay for all hours worked over 40 in a seven-day workweek. The overtime rate must be at least one and a half times the regular rate of pay and should be addressed in your work agreement. For example, if your caregiver earns $18 per hour, your work agreement should indicate that they will be paid $18 per hour for the first 40 hours worked in a seven-day workweek and $27 per hour for any additional hours. There is an overtime exemption for live-in employees under federal law and in most state laws.
7. What is workers’ compensation and do I need to carry it?
Workers’ compensation is an insurance policy that provides your nanny or senior caregiver with financial assistance toward lost wages and medical expenses if they get sick or hurt while working for you. It’s very important insurance to have because without coverage, you may be held responsible for paying your employee’s lost wages and medical expenses out of pocket. In addition, most states require household employers to carry a workers’ compensation policy and violators are subject to large fines.
Learn more about workers’ compensation insurance.
8. I own my own business. Can I add my caregiver to my company’s existing payroll?
No, this is illegal. Businesses are allowed to take tax deductions on employee payroll for employees who are direct contributors to the success of the business. The IRS has ruled that a household employee does not qualify as a direct contributor. Instead, your employee is considered a contributing member of the household, which entitles you to child or dependent care tax breaks on your personal income tax return.
If you have additional questions about hiring a nanny, you can schedule a free consultation with one of our household employment experts.
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