A Nanny Tax Guide for Employees

When you're hired to work for a family, they become your employer and take on the responsibility to make sure you're paid correctly and you're eligible for the benefits you deserve. Some of this involves tasks that don't require any work on your part, but others are important for you to understand. To make sure you're on the same page as the family, here's an overview of the tax process—from hiring through the end of the tax season.

Establish payroll correctly

The first step in the tax process is to make sure the proper amount of taxes are being withheld from your paycheck each pay period. The IRS has a worksheet called Form W-4, which is used to determine the proper number of allowances for your personal tax situation. For your convenience, we have a W-4 wizard to assist you. If you live in a state that requires income taxes to be withheld, you may need to fill out an additional withholding form. The number of allowances you choose on Form W-4 determine the amount of income taxes withheld—with the goal being to not owe any money at the end of the year (or perhaps even get a little money back).

Because there are so many factors that affect personal income tax liability, it can be difficult to keep track of everything. In fact, you should allow for "error" of up to $500—meaning you may get a refund of a few hundred dollars or you may be required to make an extra tax payment of a few hundred dollars. If you don't like the idea of writing a check at the end of the year, you should be conservative when you choose your allowances. A lower number of allowances will withhold more income taxes from each paycheck and, therefore, reduce your year-end liability. Conversely, a higher number of allowances will withhold less income taxes each paycheck and increase your year-end tax liability.

Once you have a tax history, it is easier to get closer to $0 by adjusting the number of allowances to withhold a little less or a little more each pay period. Use our Employee Paycheck Calculator to see how increasing or reducing your allowances will affect your pay.

What to expect at the end of the year

Once your payroll is set up properly, you won't have to worry about anything until the end of each calendar year. Your employer will be remitting your withheld taxes to the state and federal tax agencies on a regular basis. In January, when the tax year is complete, the family will provide you with Form W-2. It itemizes your gross wages for the tax year, along with all your federal and state tax withholdings. You should receive your W-2 by the end of January, giving you plenty of time to prepare your income tax filings before the April 15 deadline.

  • Note: if you terminate your relationship with the family during the tax year, it is your job to make sure they have your current mailing address so they can send your W-2 to you on time.

What to expect down the road

By the end of February each year, your employer will also have filed paperwork with the Social Security Administration on your behalf. About half of your taxes—along with a dollar-for-dollar match from your employer—will be going directly toward your retirement benefits. The greater your reported earnings, the more you'll receive during your retirement years.

Nobody likes to pay taxes, but it's important to understand the process—and the benefits you'll receive in return.

 
* 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.