It’s hard work finding the perfect nanny to take care of your children. But before they can start, you need to take care of one more important task: setting up their payroll and tax withholdings. Below is a step-by-step guide for how to do it correctly, but know that HomePay can take care of everything for you if you need our help.
Step 1: Confirm you have tax and payroll responsibilities
Before you start the payroll process, you want to be sure you are required to pay the “nanny tax.” Some nannies work part-time or unusual hours making many families unsure of their exact legal and financial obligations. The simple approach is to take a look at your nanny’s wages. Will they add up to $2,300 or more in a calendar year? If so, you are required to withhold taxes from their paycheck and pay employer payroll taxes.
Step 2: Talk to your nanny about how payroll works
Some nannies unfortunately are paid under the table and don’t understand how professional payroll works and why it’s actually beneficial to caregivers to be paid on the books. Make sure to discuss the difference between gross wages (before taxes) and net pay (after taxes) so your nanny isn’t caught off guard when they receive their first paycheck. This is also a good time to go over things like overtime pay and paid time off, which should be detailed in a nanny contract.
Step 3: Find a household payroll service if you need help
Yes, you can handle your nanny’s payroll and the subsequent tax process on your own, but this means an estimated 50-55 hours of preparing tax returns, performing payroll calculations and studying the ins-and-outs of federal and state household employment labor law. An accountant might also be able to help, but many are not experienced in this highly-specialized area of the tax code. Additionally, some accountants are not set up to manage payroll or provide the ongoing support and guidance on labor law issues that most families need.
Care.com HomePay can help take all the work and worry out of being a household employer by handling all aspects of nanny taxes for you.
Step 4: Gather the necessary documents
To set up payroll and be prepared for regular tax filing, you’ll need to pull together certain information about you and your nanny.
For you, this includes:
Your primary contact information. If you file “Married Filing Jointly,” your spouse must also provide their personal information.
Social Security number(s).
Federal and state tax identification numbers.
Your employee’s compensation.
For your nanny, you’ll need:
State income tax withholding selections (if you live in a state with income taxes).
Social Security number.
Mailing address so you can send them a W-2.
Step 5: Verify your nanny’s work eligibility
Before your nanny begins to work, you’ll need to fill out Form I-9 to verify they’re eligible to work in the U.S. The I-9 does not get sent to any government agency, but must be presented to authorities if your nanny’s employment eligibility is ever questioned.
Step 6: Track hours closely to manage overtime
Whether you use a payroll service or not, you’ll need to make sure to factor in overtime if your nanny works more than 40 hours in a week. When this occurs, you must pay them time-and-a-half (1.5 times their hourly rate) for those additional hours. Live-in nannies generally are not entitled to overtime, but are simply paid for every hour they work.
Note: There are special overtime requirements for live-in employees in California, Hawaii, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York and Oregon. See those details by checking the requirements in your state.
Step 7: Calculate and track taxes
If you handle payroll on your own, you’ll need to calculate the taxes withheld from your nanny and the taxes your incur as a household employer so you can file state and federal employment tax returns. The state and federal deadlines run on different schedules, so you’ll need to keep a calendar of these deadlines.
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* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.