Nanny tax procedures every family should know about

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If you’re hiring a nanny, you may have heard the term “nanny taxes.” But what exactly are they and are they applicable to you?

 

You should know: If you pay a nanny (or any other caregiver) $2,100 or more during the course of the calendar year, you must withhold taxes from their paychecks and pay your share of taxes as a household employer. Not only is it illegal if you don't, but it may also do your nanny a huge disservice. Your nanny is breaking the law, too when they’re not reporting the wages they’re earning from you. And not having proof of income can prevent them from qualifying for things like car loans and apartment rentals.

 

"I've had clients tell me they pay taxes simply because, in their profession, customers expect them to do things the right way,” says Tom Breedlove, Sr. Director of Care.com HomePay. “They're not considered trustworthy if they do the opposite in their personal lives."

 

What are the benefits of paying taxes for your nanny?

Yes, taxes add an extra cost to your care budget, but they’re also important for your financial well-being. Here are a couple of the benefits of paying your nanny legally.

 

  • Financial security for your nanny — now and in the future. Having taxes withheld will ensure that your nanny can prove their work history, collect unemployment if you have to let them go and build credit with the Social Security Administration so they’ll qualify for Medicare and Social Security payments upon retirement.
     

  • 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. All it takes is for your former nanny to file for state unemployment benefits, which triggers the IRS to realize you've never paid household employment taxes. Or if the working relationship between you and your nanny sours and they file a wage dispute, your lack of tax payments could easily be brought to light.

    Find out if your industry is on the list of the Top 11 professions most at risk if not paying nanny taxes.
     

How much will I have to pay in nanny taxes?

A good estimate is 10 percent of your nanny's gross wages, but this can vary by state. Social Security taxes are 6.2% and Medicare taxes are another 1.45%. The rest is made up of unemployment insurance taxes and any additional taxes your state may assess. Check the details in your state for more information.

 

If you'd like to run a specific budgeting scenario, check out our nanny tax calculator for a quick answer.

 

Are there tax breaks to lower the cost of my nanny taxes?

Yes, there are two tax breaks most people can take to offset the tax liability you incur by hiring a nanny:

 

  • Dependent Care Account. Ask your employer if they offer a Dependent Care Account (a type of FSA) as part of your benefits package. This lets you set aside up to $5,000 of your annual income before taxes and then use that money to pay for child care expenses, such as your nanny’s wages. Reducing your overall taxable income by $5,000 will reduce your tax burden. Your tax savings will depend on the tax bracket you're in, but most families save about $2,000 per year.
     

  • Child Care Tax Credit. This lets you claim 20 percent of the first $3,000 you spend on child care if you have 1 child, or $6,000 if you have 2 or more children. This results in up to either $600 or $1,200 in savings. If you have one child, it’s usually better to use a Dependent Care Account if you have access to it.

    If you have 2 or more children, you can use both tax breaks! Your first $5,000 in child care expenses will go toward the FSA and an additional $1,000 can be put toward the child care tax credit. This saves you an additional $200.
     

How do I set up payroll for my nanny and start making tax payments?

The most efficient way to pay taxes on your household employees is to sign up with a payroll service like HomePay. For a quarterly fee, we'll direct deposit your nanny's paychecks to her bank account, withhold all appropriate taxes and file them electronically. If you’re more of a DIY person, read our tips on how to pay nanny taxes yourself.

 

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.

 

310 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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