As the school year ends, you’re likely facing the decision of what to do with your kids for the summer break. With after-school care no longer an option and daycare and summer camp spots in high-demand, many families opt to hire a nanny, who can 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 who 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 you’re still able to take full advantage of the child care tax breaks, which almost always results in a complete offset of tax costs.
Budgeting example for summer nanny
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Say a family hires a summer nanny for $800 per week for 12 weeks to watch their two kids, ages 8 and 10. The wages they pay the nanny come out to $9,600, but at the end of the summer, their total employer cost looks like this:
| Gross Wages Paid to the Nanny | $9,600 | |
| Social Security Taxes | + $595 | |
| Medicare Taxes | + $139 | |
| Unemployment Insurance Taxes | + $250 | |
| Total Employment Taxes: | = $984 | + $984 |
| Total Cost to the Family (before tax breaks) | = $10,584 |
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 (a type of Flexible Spending Account, or FSA) through their employer, which allows them to pay for up to $5,000 of child care expenses tax-free.
Example out-of-pocket cost for summer nanny
| Cost Before Tax Breaks | $10,584 |
| Savings from FSA | -$2,000 (based on our sample tax bracket) |
| Total Cost of Summer Nanny | $8,584 |
As you can see, the family is now saving $1,016 by paying their summer nanny on the books!
It’s important to note that the IRS considers a change in child care needs 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 child care tax credit (IRS Form 2441) to apply up to $6,000 in child care expenses to this tax credit. Most families will get a 20% tax break so we’ll assume the same is true for the family in this scenario.
| Cost Before Tax Breaks | $10,584 |
| Savings from Child Care Tax Credit | -$1,200 |
| Total Cost of Summer Nanny | $9,384 |
In this scenario, you still come out ahead by $216. 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:
- Find a nanny for the summer.
- Learn about the tax and payroll responsibilities you have when you hire a summer nanny.
- Download a sample nanny contract.
