Caregivers: Here's how payroll and taxes work

Updated

If you're a nanny or in-home caregiver who makes more than $2,100 a calendar year from a family, it means you're legally required to be on payroll. What does being on payroll mean, you may ask? It means taxes are withheld from your wages and you receive a pay stub every pay period.

 

Having a conversation with a potential employer about money can be awkward, but it's necessary to talk through gross wages, taxes and net pay so you can both budget accordingly and know exactly how much to expect in your bank account each week. The first thing, though, is to understand how it all works. Payroll functions a little differently for you versus the family, so it's important to understand the details as you move forward in negotiating your pay.

 

The basics of payroll for nannies and caregivers

When you're on payroll, you'll have taxes withheld from the amount of money you earn each week. The family will also pay additional taxes on top of what they pay you. This means that both you and them have to account for a separate weekly total when discussing how much youll be paid. Keep this in mind as youre doing research looking up the going hourly rate for caregivers in your area.

 

What you need to know about gross wages and net pay

Gross wages are the amount of money you earn before taxes are withheld. Your gross wage determines how much in taxes should be withheld from your pay and how much in taxes the family will have to pay. Once all the appropriate taxes have been deducted, the amount you are left with is called your net pay - also called take-home pay.

 

Sample payroll scenario

Let's go through a sample payroll scenario to help clarify everything. Say you agree to work for a family for 40 hours per week at $12.50 per hour. Here's how your paycheck would look every week:

 

Gross Wages: 40 hours X $12.50/hr. = $500/week

Tax Withholdings (assuming single with 2 allowances on your W-4):

  • Social Security taxes: $31.00 (6.2% of your gross wages)

  • Medicare taxes: $7.25 (1.45% of your gross wages)

  • Federal income taxes: $37.00 (based on how you fill out your W-4)

  • State income taxes: $20.48 (based on how you fill out your state withholding form)

  • Total Tax Withholdings: $95.73

Net Pay: $404.27/week

 

Remember, there are some additional taxes to the family. They have to pay an equal amount of Social Security and Medicare taxes as well as unemployment insurance taxes. Based on your gross wages, the family would take on about $50 in additional taxes, which means it would really cost them about $550 each week to hire you.

 

Run a more specific payroll scenario for yourself to see exactly what your paycheck may be.

 

What happens to the taxes deducted?

In the example above, the tax withholdings of $95.73 each week is an approximate pre-payment against your year-end tax liability. The family will send these taxes throughout the year to the IRS and the state so you have a credit with them. When you file your personal income tax return, the credit will be applied, offsetting most if not all of your liability. If there was too little withheld from you, the IRS will ask you to pay more with your tax return. If too much was was withheld, you'll get a tax refund.

 

The benefits of paying taxes

Tax evasion is, of course, illegal, and you can face steep fines from the IRS for not paying your taxes. But aside from avoiding that trouble, there are other benefits too. When payroll is set up correctly, you'll have a traceable employment history that is necessary if you want to purchase a vehicle, apply for a loan, rent an apartment or buy a home. Additionally, you'll have access to unemployment benefits if you get laid off from your job. And when it's time to retire, you'll have credit built up with the Social Security Administration that they can use to determine how much in benefits youll receive during your golden years.

 

So when you think of payroll, don't necessarily think of it as a burden think of it as an investment into benefits you may need in the short and long term.

 

 

 

* 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 adviser 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.