How much will nanny taxes cost your family?

Updated

You’ve found a nanny to help your family — and know you’ll need to pay household employment taxes (often called “nanny taxes”)  if you pay her $2,100 or more during the calendar year. Just how much will this cost you, though?

 

The good news is that with tax breaks, nanny taxes likely will not cost you as much as you expect.  For help demystifying what it actually costs to pay your nanny legally — and how you can save money doing so — watch this video and read the corresponding tips below.

 

How much do nanny taxes cost?

Your total cost will depend on the state you live in, but you should expect to pay about 10% of what your nanny’s gross (before taxes) wages are in household employment taxes. These taxes generally break down as follows:

  • 6.2% in Social Security taxes.

  • 1.45% in Medicare taxes.

  • Approximately 2.35% in federal and state unemployment insurance taxes. This can vary quite a bit depending on the state you live in.

 

To see what specific taxes you’ll owe, check out the requirements in your state.

 

Are there tax breaks I can use to decrease these costs?

Yes. As long as you’re paying your nanny legally, there are two child care-related tax breaks you can take advantage of:

 

  • Dependent Care Account

This is a type of flexible spending account (FSA) that is likely available to you or your spouse through your employer. A Dependent Care Account allows you to pay for up to $5,000 of child care-related expenses with pre-tax dollars. That means you would not have to pay any taxes on that portion of your nanny's wages. Depending on your marginal tax rate, an FSA can save you about $2,000 per year.

 

To enroll, check with your HR department. Most companies have an open enrollment once a year (usually in the Fall) for the subsequent tax year. However, families can enroll at any time if they have a life-changing event, such as the birth of a child.

 

  • Child Care Tax Credit

If your family does not have access to an FSA — or you can't enroll until the next tax year — you can take advantage of the Child Care Tax Credit. Using IRS Form 2441, you can itemize up to $3,000 per child per year (up to $6,000 total). Most families qualify for a 20 percent tax credit, so the net savings is up to $600 if you have one child and up to $1,200 if you have two or more children.

 

Note: Families with two or more children can use both tax breaks. Use your FSA, with which you can save the most money, for the first $5,000 of childcare expenses and then apply an additional $1,000 toward the Child Care Tax Credit to save an additional $200.

 

To qualify for these tax breaks, your kids must be under age 13 and both you and your spouse must work, be looking for work or be a full-time student.

 

Is there a way to estimate my nanny tax costs and my tax breaks?

Care.com HomePay has a budgeting calculator that will allow you to do exactly that. You just need to input your nanny’s hourly rate, how many hours they’ll work, what state you live in and whether you have access to an FSA. The results will show you the total cost for hiring your nanny along with your tax savings. It’s a smart way to set a realistic care budget.

 

A final cost factor to consider is whether to hire an expert to manage your nanny's payroll and handle all the employment tax returns (preparation, filing and remittance) on your behalf. Care.com HomePay can take this work off your plate and you’re welcome to call for a free consultation and to learn more about how our service works.

 

Taking care of nanny taxes correctly prevents legal problems for families and ensures that employees receive the benefits and protections they deserve. When you factor in the child care tax breaks, you can see it really is more affordable than most people think.

 

Your Next Steps:

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

 

7 Comments

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Stephanie Breedlove

Hi Wendy! First of all, I would like to say that you are a very thoughtful and generous person to be thinking so much about the effect your pay will have on the family that hires you. It's a tough question for me to answer simply because I don't know your life situation and how much you will need to earn to provide for your family. What I can tell you is that the International Nanny Association (INA) does a salary survey from time to time and while their sample size isn't extremely large, they came up with an average salary of $830 per week gross pay for nannies in New York City. I know you don't live in the city, but that is the closest area surveyed compared to where you live. I would also suggest using Care.com's pay calculator (www.care.com/nanny-pay) to get an idea of how much in taxes you will need to budget for. I hope this employment situation works out well for you!
July 01, 2013 at 11:12 AM
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Wendy S.

I need to know what is a fair salary to take home after taxes when working 45 hours a week. I have read all of your tips and it says after 40 hours in NY state I am entitled to Vernon time / time and a half. I just want to be sure I am making the right decision on how much I ask for and accept as a nanny who has a family of my own to support but also take into consideration my employers pocket and what they can afford.
June 30, 2013 at 8:58 AM
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Stephanie Breedlove

Hi Thalia! Generally speaking, if you are let go from a job due to no fault of your own, you will be entitled to unemployment benefits from the state. Depending on several factors, including how much in benefits are paid out to you during your unemployment period, the family's state unemployment insurance tax rate can go up. However, this will only affect the family if they re-hire another employee in the future.
May 24, 2013 at 11:20 AM
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Thalia F.

I am working on the books was full time now part time as child is in scchool 3 hrs a day. They take ss tax out and pay there portion, one year when they went on vacation for 6 weeks I was able to collect unemployment now that my employment will end due to the grandparents moving in and will care for child , they seem to think that is is an end of a contract that I would be able to collect. we have not had a contract since the 2nd year. They say if I clainm it that there taxes will raise. I need to look out for myself. I am on social security but depend on that weekly income to suppliment. Shouldn't I be able to collect when the postion no longer exists?
May 23, 2013 at 6:42 PM
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Jason H.

Another point worth considering is that if you do taxes, the Nanny gets less in take home pay, which generally means that the family has to pay more. The examples that Care.com has been providing are not really honest, since they assume the Nanny will just magically work for less money. It all comes out of the Family side at the end of the day, because the Nanny must have a given amount of take home pay to make their own ends meet.
September 30, 2012 at 6:43 PM

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