How tax breaks make hiring a summer nanny an affordable option for families

Tax breaks make hiring a summer nanny an affordable option

Updated

As the school year ends, youre likely facing the decision of what to do with your kids for the summer break. With after-school care no longer an option and day care and summer camp spots in high-demand, many opt for a nanny to provide high-quality one-on-one care in their home. And due to the way tax and payroll laws work out, hiring a nanny can be a very cost-effective choice.

 

You see, families that hire help on a short-term basis have a unique tax advantage: Your employer taxes are tied to the wages paid to the summer nanny, so your tax obligation is relatively low since the nanny only works for about three months. Yet youre still able to take full advantage of the child care tax breaks, which almost always results in a complete offset of tax costs.

A budgeting example

Say a family hires a summer nanny for $500 per week for 12 weeks to watch their two kids. The wages they pay the nanny come out to $6,000, but at the end of the summer, their total employer cost looks like this:

Gross Wages Paid to the Nanny

   $6,000

Social Security Taxes

+ $372

Medicare Taxes

+ $87

Unemployment Insurance Taxes

+ $156

Total Employment Taxes

   $615

Total Cost to the Family (before tax breaks)

   $6,615

 

By paying their nanny on the books, the family qualifies for tax breaks because each parent works and both of their children are under 13. The family is enrolled in a Dependent Care Account (also known as a Flexible Spending Account, or FSA) through their employer, which allows them to pay for $5,000 of childcare expenses tax-free.
 

Cost Before Tax Breaks  $6,615
Savings from FSA- $2,000 (based on the family's tax bracket)
Total Cost of Summer Nanny  $4,615

 

As you can see, the family is now saving $1,385 by paying their summer nanny on the books!

 

It's important to note that the IRS considers a change in child care to be a life-changing event. That means you can enroll in a Dependent Care Account mid-year if you hire a summer nanny.
 

What if the Family Doesn't Have Access to an FSA?

You can still use the Tax Credit for Child or Dependent Care (IRS Form 2441) to save 20% on up to $6,000 of your child care costs.
 

Cost Before Tax Breaks  $6,615
Savings from Child Care Tax Credit- $1,200
Total Cost of Summer Nanny  $5,415

 

In this scenario, you still come out ahead by $585. If you paid your summer nanny under the table, you would not be eligible for either of these tax breaks.

 

If you're trying to budget for summer care, crunch the numbers yourself and see how affordable it can be for you and how beneficial it could be for your kids.

 

Next Steps:

 

First things first—have you hired a caregiver?

If you're seeking a caregiver or a care job, visit Care.com

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