Nanny Tax Forms and Procedures: What Are They All About?

nanny tax paper and calculator

There are few conversation topics that make parents more squeamish than nanny taxes. Case in point: We couldn't find any moms willing to go on the record about how they handle their nannies' income. The truth is, whether it's because taxes seem too confusing or expensive, there are a lot of families paying nannies "under the table," which is illegal.

But are the weekly savings and lack of paperwork worth the risk? "The IRS is very clear; if you have a household employee, you must withhold and pay employment taxes," says Stephanie Breedlove, VP of Care.com HomePay.

If you pay a caregiver more than $1,900 per year, you have to pay taxes. Not only is it illegal if you don't (more on that in a minute), but it may also do your nanny a huge disservice -- setting her up for a future without retirement benefits and leaving her to apply for a mortgage or a car loan without proof of income.

Your nanny is probably the only person who spends more time with your child than you do -- are you comfortable knowing that you're both skirting the law? "I've had clients tell me they pay taxes simply because in their profession, customers expect them to do things the right way. They're not considered trustworthy if they do the opposite in their personal lives" says Breedlove.

Here's what you need to know about paying taxes for your nanny:

What Are the Benefits of Paying Taxes?
Taxes aren't all bad. Here are a few of the benefits of paying your nanny legally.

  • Financial security for your nanny -- now and in the future. Paying income tax will ensure that your nanny can build a work history, collect unemployment if you have to let her go and qualify for essential government benefits like worker's compensation, Medicare and Social Security payments later in life.
  • Peace of mind for you. You may think that if you're not running for office, you'll never get caught not paying taxes. But it happens more often than you'd think. "The most common way that people get in trouble for not paying these taxes is when your nanny tries to file for Medicare or Social Security at some point down the road," says Amy Torres, an attorney and nanny success coach. Adds Breedlove: "Or the nanny may have to file for unemployment benefits, at which point she'll have to list all the families she's worked for over the past several years."
  • You don't want to get caught. If you get audited, go through a messy divorce or your nanny reports her income to the IRS (see above), your under-the-table payments can come back to haunt you -- in an expensive way. "You'll have to pay all the taxes you should have remitted in the past, including the Social Security and Medicare taxes that should have been withheld from the employee's pay," warns Breedlove. You may also be subject to large fines -- the amount of which can vary substantially based on IRS analysis and the severity of the case. "These fines are going up as the government is paying closer attention to household employees," notes Torres. And if you're a lawyer, doctor, or in another profession that is licensed by the state, you may face professional penalties or even lose your license.

    Find out if you're on the list of the Top 11 Professions Most at Risk if Not Paying Nanny Taxes »

How Much Will I Have to Pay?
Check out our nanny tax calculator for a quick answer.

You'll likely need to withhold around 13 to 20 percent of your nanny's gross wages to cover federal and state taxes (between 1 and 5 percent), as well as Medicare and Social Security (employers are responsible for 7.65 percent, while employees currently pay 5.65 percent -- this might go back to 7.65 percent in 2012), depending on your nanny's income and your own income and tax bracket.

Here's an example: Say you pay your nanny $600 per week ($15 per hour, 40 hours per week), you'll need to withhold the following from her take-home pay:

  • Federal Income Tax: $75.77
  • Social Security: $25.20
  • Medicare: $8.70
  • State Income Tax (3.7%): $22.30 (note: we used New York State. Here's where you can find your state income tax rate.)

Total withholdings: $131.97

You'll also need to make the following contributions:

  • Federal Unemployment: $4.80
  • Social Security: $37.20
  • Medicare: $8.70
  • State Unemployment: $24.60 (note: we used New York State. Find yours by contacting your state unemployment tax agency)

Total Additional Payments: $75.30

This means your weekly bill comes to $675.30 per week, and your nanny will take home $468.30. Over the course of the year, you can expect to shell out $33,991.30 -- $2,791.30 more than if you paid a flat $600 per week under the table.

Consult the IRS' Household Employers Tax Guide for more details on each of these withholdings.

Doesn't that Mean I Pay More and My Nanny Gets Less?
Week-to-week, yes. Household employers can't tax deduct employees' wages the way businesses can, so you end up paying the majority of your nanny's salary with your own after-tax income. And she'll take a hit in her weekly paycheck when you start withholding the government's piece of the pie. So you may need to increase your nanny's salary so that her take-home pay doesn't take as much of a hit (again, use this Nanny Tax Calculator to run your own numbers).

The Good News:
But there are more benefits!

  • You can pay with some pre-tax dollars. Ask your employer if they offer a Dependent Care Account (DCA). This lets you set up to $5,000 of your annual income aside before taxes, and then use that money to pay your childcare bill. Reducing your overall taxable income will reduce your overall tax burden, which may help balance out the extra you're paying in nanny taxes, but can get maxed-out if your child is also in a preschool program.
  • You may qualify for the federal dependent and child care tax credit. This lets you claim around 20 percent of the first $3,000 you spend on child care per child. This tax credit, combined with your DCA, can save you about $1850 per year -- meaning you're only coughing up an extra $941 at the end of the day, to pay your nanny's taxes using the numbers above. (Note: If you have one child, you'll have to choose between this tax credit and a DCA.)
  • Your nanny earns more in the long-term. Think of that extra $75.30 per week as a deferred raise for your nanny -- because she'll be able to collect on it when she files for Medicare, Social Security or unemployment. "When nannies understand the benefits and financial protections that come from our payroll tax system, they're much more comfortable with the idea of being paid above board," notes Breedlove. This should provide some assurance to your nanny if she is nervous about how she'll manage with less take-home pay.

How Do I Set Up My Tax Payments?
The most efficient way to pay taxes on your household employees is to sign up with a payroll service like Home Pay. For a quarterly fee, they'll direct deposit your nanny's paychecks to her bank account, withhold all appropriate taxes and file them electronically. They also have easy and free nanny tax calculators you can play with to determine how much your nanny will take home at the end of the day.

The most important thing to keep in mind is that you can handle this process. It might seem like a lot, but once you get the hang out it, you'll be fine -- and legal!

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.

For more tips and advice, check out these Nanny Tax Articles.

20 Comments

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Tom B.

Hey Fion. Great question. The state of New Jersey recognizes the federal exemption for withholding and filing taxes on a parent, so you're good to go. Only Washington, New York and Colorado make families pay SUI taxes.
April 29, 2015 at 1:02 PM
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Fion

I am married and I am planning to pay my mom $1,000 per month to take care 2 of my children which are under age 18 in order for my husband and I to work full time. As per my understanding, we are not required to pay employment tax on the federal level. Do you know if I need to file the employment tax for NJ State (i.e. unemployment tax, SUI, SDI and etc).
April 28, 2015 at 9:20 PM
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Tom B.

Hey Shellyann. I'm very sorry to hear the family didn't go through with signing up for the HomePay service because we definitely would've taken care of getting you a W-2. It's hard for me to know 100% if they reported your wages, but I'm guessing not since they gave you a 1099. In terms of what you can do at this point, I would suggest taking a look at this Care.com article (https://www.care.com/homepay/last-minute-tax-tips-for-nannies-1403121630). It has some great steps you can take to try and get everything corrected.
April 15, 2015 at 12:49 PM
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Shellyann F.

Hi I worked for a family making an average of over 16,000+ in a year. When tax time came they told me fill out a w4 so they could take the right step to pay taxes through care.com homepay and provide me with a w2. I did just that. In Feb I stopped working for them ..now in April they left me a 1099 form !... It has their name as the employeer..their tax id number and the amount of wages paid to me. Does this mean they reported my wages to IRS? Will I have to pay taxes? I'm located in nj
April 12, 2015 at 4:18 PM
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Marta

Hello, in 2012 (3 yrs after my original 2009 tax return) irs came back telling me i need to file a 1099 for ,my nanny who at that time was no longer babysitting. They told me i would need to calculate what i owe. I have been to many tax places and no one is able to help. Now its 2015 and im afraid of the penalties I may owe for not yet correcting this . I have been filing my taxes every year but IRS has not sent any notices on this past matter. I dont know what to do or how to calculate exactly what is owed.
April 04, 2015 at 12:57 AM
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Tom B.

Hey Vee Mitchell. You definitely don't have to withhold taxes from your sister because she'll earn so little. You also most likely won't have to pay taxes because unemployment insurance taxes kick in when you pay her $1,000 in a calendar quarter. In terms of this income affecting state aid, I can't answer that, but you should check with the state agency providing her with this aid. In terms of paperwork, the easiest solution would be to make a paystub template and fill it out each time you pay her. Give her a copy and keep a copy for yourself. You'll need this wage information so you can apply it to either an FSA or Child Care Tax Credit.
March 19, 2015 at 12:38 PM
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Vee Mitchell

I want to pay my sister for part time child care out of my house for 2015 & 2016. The total amount paid out for the entire year of 2015 $1,000.00 and $1,600 for 2016. My sister is on state aid. She has no other income/job and has (2) kids. 1. Do I have to pay taxes? 2. Does she have to pay taxes? 3. Does the $1,600.00 affect her ability to collect state aid? 4. Is there paperwork I can have her fill out that discloses the amount she makes?
March 18, 2015 at 4:21 PM
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Tom B.

Hello PBJ. Since your mother is taking care of your kids, you don't have to withhold taxes or pay taxes on the income you provide her. The IRS makes an exception for parents watching their children's kids. This means you mother doesn't need a Tax ID.
March 10, 2015 at 11:26 AM
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Tom B.

Hey Jennifer. The way payroll laws are written, the stipend you give to the nanny will need to be factored into her hourly rate and would be taxable income. You are allowed to show it to the nanny on her paystub as an additional line item if you would like, but the easier solution would be just to talk to the nanny and let her know you want to give her a stipend for travel and that the amount will be reflected in a higher hourly rate for her. Just remember to fill out a new Wage Notice and give it to her as the state of New York requires this when your employee's pay rate changes.
March 10, 2015 at 11:24 AM
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Cristina A.

Tom B, just a comment, every interview I have gone on thru Care.com the family will only do taxes by giving me a 1099 form and having me file. I tell them that is not the correct way and they say that is how they have always done it and will continue to do so. If I do not want to go that way since it is illegal they will not hire me. You can say what you want but the families will do what they want in the long run, they do not want to pay anything more out of their pocket and want the Nanny to pay for the taxes herself as a self employer
March 05, 2015 at 7:35 PM
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PBJ

My mom is paid about $2,000/year to cover food and gas for when she watches my children 5 days/40 hours each week (if my math is correct that's less than the cost of a snack for 1 child). Does she have to have a tax ID? What I pay her doesn't even cover the expenses she incurs but my ex-husband is demanding a tax ID number. Help please.
March 05, 2015 at 1:19 PM
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Jennifer P.

Hello. I live in New York state. The part-time nanny that we have chosen lives a bit far from our house, but we don't want to lose her to another family closer to her home. We would like to pay her a travel stipend to make up for some of the distance. We don't think this should be categorized under "mileage" because she is not using her vehicle for work, we are only talking about her daily commute and we realize that is usually not reimbursable. We would prefer to give her a travel stipend now instead of simply increasing her hourly rate because she is planning to move much closer to our home, and the stipend was her idea and her preference to make it work for right now. Is there a way to properly pay and declare a travel stipend offered to an employee for excess commuter distance? How would we report that expense, and how would she report that income (is this taxable income or an expense reimbursement)? Any help that you can give on this would be greatly appreciated. Thank you!
February 24, 2015 at 9:55 PM
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Tom B.

Hello Mia. You definitely have a lot going on, so I'll try to help you as best I can. Generally you can file as head of household if your spouse did not live in the home during the last 6 months of the year and your home was the main home of your child. You would have to file your taxes as unmarried though to claim head of household. In terms of your income taxes, you can make estimated tax payments to the IRS throughout the year so you don't owe them all at tax time. The HomePay service can definitely make the calculations for you if the family you work for utilizes our service. Have a discussion with them and have them give us a call. We'll take care of their tax filings too.
February 18, 2015 at 7:13 PM
Photo of Tom B.

Tom B.

Hey Katie. To be blunt, the family is breaking the law if they are hiring you under the table. The IRS and the state of California are very clear that taxes should be withheld from you and paid by them throughout the year. In fact, California has some of the most stringent household employment laws in the country and requires a Wage Notice to be given to employees at the time of hire that discloses your pay rate, pay frequency, workers' compensation insurance provider, etc. I would send the family to our website to see the payroll and tax responsibilities they have because failing to comply can be very expensive if they are ever caught. (http://www.myhomepay.com/Answers/State-Nanny-Tax/CA/Overview)
February 18, 2015 at 7:04 PM
Photo of Tom B.

Tom B.

Hello Amelia. I'm sorry to hear that you incurred a tax bill from the IRS. Even if you negotiate your weekly pay based off of what you want to take home (net pay), you still need to provide your employer with a federal W-4 and an Illinois IL W4 so they know how much in income taxes to adjust for. My guess is that you owe money to the IRS because your withholdings were too low. We have both the federal and state forms you'll need on our website if you'd like to download them and fill them out for your employer. (http://www.myhomepay.com/Resources/Forms)
February 18, 2015 at 6:46 PM
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Tom B.

Hi Phuong. Unemployment insurance taxes are due at both the federal and state level. In order to pay them, you will indeed need a federal and a state tax ID. Care.com has a really good article for families that are trying to catch up on their tax responsibilities at this time of the year. It should answer all your questions. (https://www.care.com/homepay/last-minute-tax-tips-for-families-1403201632)
February 18, 2015 at 6:33 PM
Photo of Tom B.

Tom B.

Hey Heather. As a caregiver, the only reason you'd be doing your own taxes is if you're a true independent contractor running your own caregiving business. If you're just going over to a family's home caring for their child, the IRS will most likely say you're an employee and require you to have taxes withheld like this article describes. Employees can opt to not have income taxes withheld from their pay and choose to pay them on their own, but that's all. Families and employees don't have a choice in how taxes are handled. It's all dictated by how the working relationship is established.
February 18, 2015 at 6:30 PM
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Tom B.

Hey BB. Based on the information you provided, you would be considered a household employee. Control over the working relationship is much more important to the IRS than where the care is being provided.
February 18, 2015 at 12:59 PM
Photo of Tom B.

Tom B.

Hello Heather. The IRS does want you to report all income you receive, so the $800 can easily be claimed by entering it into Line 7 of the 1040 with the letters "HSH" to designate household employment. The IRS may decide to tax this income or they may not, but at least you're letting them know.
February 18, 2015 at 12:57 PM
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Mia

I have a tricky question. I'm married, my spouse was incarcerated in May 2014 & has lived away from home for 8 months in 2014. In 2015, he is sill in jail, release date not known yet. He worked 4 months only in 2014. I worked the whole year. I have not filed 2014 taxes yet. I don't know what my filing status should be. Can I file as head of household & married? I have one dependent, a 2 year old, who goes to daycare fulltime. I pay for our home's upkeep & for my husband's daily expenses in jail, I send weekly payments to his jail finance account. I work as a full-time nanny for a baby. My employer pays my social security & medicare, I am responsible for my federal & state taxes. I work 8am to 6pm M-F, 50 hrs a week at $10/hr. I don't drive the baby anywhere. I have my own government assisted health insurance with Anthem. Am I doing everything right? Also with your payroll program, can I pay my federal & state taxes quarterly, so I don't have to have a huge bill at the end of the year? And does your program figure it out automatically so I don't have too? Also how much is your monthly fee for that service? Any suggestions will be highly appreciated.
February 18, 2015 at 11:30 AM

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