How to budget and manage taxes in a nanny share
When two families agree to a care share, there are unique tax and payroll rules to follow
To afford professional, in-home child care, many families opt for a nanny share or care share so they can split the cost with another family. These arrangements have risen in popularity over the past few years because it’s a more budget-friendly option for families and typically provides higher pay for the nanny. Keep reading to learn more about:
- How payroll works in a nanny share
- How taxes should be managed in a nanny share
- Tax breaks available to nanny share families
Note: Because of COVID-19, some families are setting up learning pods to provide in-home child care. These arranagements would generally be considered nanny shares, so please read on for how to arrange this correctly.
In an optimal situation, a nanny working in a nanny share will be caring for each family’s kids at the same time for every hour they work. In this scenario, it’s simple to split the nanny’s hourly rate in half and know how much each family owes every week. As long as the nanny is earning at least minimum wage for every hour they work, both families are in compliance.
“Where nanny shares get complicated is when the nanny is only needed for one family for a few extra hours or even a full day’s work,” says Tom Breedlove, Sr. Director of Care.com HomePay. “In this situation, the family whose children are being cared for needs to make sure they’re paying at least minimum wage for the hours the nanny is working solely for them — even if their typical contribution toward the nanny share is below minimum wage.”
The easiest way around this problem is for each family to contribute at least the minimum wage rate in their state to the nanny share. For instance, minimum wage in Texas is $7.25/hour so if the nanny is paid at least $14.50/hour, each family will be in compliance with federal and state minimum wage laws regardless of the care arrangement for the day.
In a nanny share, the IRS views each family as a separate household employer, even if the care is provided in only one family’s home. Each family is required to establish themselves as a household employer with the IRS and the state by applying for federal and state tax identification numbers.
The families should pay the nanny separately, withholding the appropriate taxes each pay period based on their share of the nanny’s wages. Both families should also remit payroll taxes to the IRS and state agencies on their portion of the nanny’s pay.
Although it may seem administratively easier to have one family handle all the tax withholdings and remittance, this creates risk for the family who is not registered as a household employer. For example, if the nanny applies for unemployment insurance benefits, they’ll list both families as employers and the state will only have record of one family paying taxes.
Read more about setting up a payroll account for a nanny.
The good news is that while you pay less in a nanny share, you get the same tax breaks as if you weren’t splitting costs. When each family properly handles their household employer tax obligations on their portion of the nanny share, both families may be eligible for child care tax breaks.
Remember that both families are splitting the cost of the nanny's wages and the subsequent tax liability, but they don’t have to split the tax breaks. This is because each family is a separate employer and may use a Dependent Care Account and/or the Child and Dependent Care Tax Credit. These tax breaks result in approximately $2,000 - $2,200 in tax savings, which is likely to offset nearly all of each family’s household employment taxes.
A budget scenario to highlight tax breaks in a nanny share
Let’s use the example above of a family in a nanny share in Texas where the nanny earns $14.50/hour for 40 hours of work per week, split between two families. Each family has two kids and both can utilize the tax breaks just discussed. Here’s an approximation of what each family’s budget would look like:
|Weekly Cost||Annual Cost|
|Gross wages for the nanny||$290.00||$15,080.00|
|Household employment taxes||$27.67||$1,438.84|
|Cost before tax breaks||$317.67||$16,518.84|
|Savings from tax breaks||-$42.31||-$2,200.00|
|Total cost after tax breaks||$275.36||$14,318.84|
As you can see, not only do the tax breaks offset the family’s tax liability, but they actually save money in this scenario! If you’d like to run your own budgeting scenario, use HomePay’s employer budget calculator for an estimate of your tax costs and potential savings.
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