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Caregivers: Here’s how taxes and payroll work

Learn what it means to be paid on the books and how taxes are calculated

Learn about the tax and payroll process for caregivers

If you’re a nanny or in-home caregiver who makes more than $2,300 a calendar year from a family, it means you’re legally required to be on payroll. What does being on payroll mean, you may ask? It means taxes are withheld from your wages and you receive a pay stub every pay period.

Having a conversation with a potential employer about money can be awkward, but it’s necessary to talk through gross wages, taxes and net pay so you can both budget accordingly and know exactly how much to expect in your bank account each week. The first thing, though, is to understand how it all works. Payroll functions a little differently for you versus the family, so it’s important to understand the details as you move forward in negotiating your pay.

How does payroll work if I’m a nanny or senior caregiver?

When you’re on payroll, you’ll have taxes withheld from the amount of money you earn each week. The family will also pay additional taxes on top of what they pay you. This means that both you and them have to account for a separate weekly total when discussing how much you’ll be paid. Keep this in mind as you’re doing research looking up the going hourly rate for caregivers in your area.

What is the difference between gross wages and net pay?

Gross wages are the amount of money you earn before taxes are withheld. Your gross wage determines how much in taxes should be withheld from your pay and how much in taxes the family will have to pay. Once all the appropriate taxes have been deducted, the amount you are left with is called your net pay – also called take-home pay.

Sample payroll scenario

Let’s go through a sample payroll scenario to help clarify everything. Say you agree to work for a family for 40 hours per week at $12.50 per hour. Here’s how your paycheck would look every week:

Gross Wages: 40 hours X $12.50/hr. = $500/week

Tax Withholdings (assuming single with no dependents on your W-4):

  • Social Security taxes: $31.00 (6.2% of your gross wages)
  • Medicare taxes: $7.25 (1.45% of your gross wages)
  • Federal income taxes: $37.00 (based on how you fill out your W-4)
  • State income taxes: $20.48 (based on how you fill out your state withholding form)
  • Total Tax Withholdings: $95.73

Net Pay: $404.27/week

Remember, there are some additional taxes to the family. They have to pay an equal amount of Social Security and Medicare taxes, as well as unemployment insurance taxes. Based on your gross wages, the family would take on about $50 in additional taxes, which means it would really cost them about $550 each week to hire you.

Run a more specific payroll scenario for yourself to see exactly what your paycheck may be.

What happens to the taxes deducted from my caregiving wages?

In the example above, the tax withholdings of $95.73 each week is an approximate pre-payment against your year-end tax liability. The family will send these taxes throughout the year to the IRS and the state so you have a credit with them. When you file your personal income tax return, the credit will be applied, offsetting most, if not all of your liability. If there was too little withheld from you, the IRS will ask you to pay more with your tax return. If too much was withheld, you’ll get a tax refund.

What are the benefits of being on payroll and paying taxes?

Tax evasion is, of course, illegal, and you can face steep fines from the IRS for not paying your taxes. But aside from avoiding that trouble, there are other benefits too. When payroll is set up correctly, you’ll have a traceable employment history that is necessary if you want to purchase a vehicle, apply for a loan, rent an apartment or buy a home. Additionally, you’ll have access to unemployment benefits if you get laid off from your job. And when it’s time to retire, you’ll have credit built up with the Social Security Administration that they can use to determine how much in benefits you’ll receive during your golden years.

So when you think of payroll, don’t necessarily think of it as a burden think of it as an investment into benefits you may need in the short and long term.

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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.