After you hire someone to work in your home, you’re responsible for managing household employment taxes, otherwise known as “nanny taxes.” However, some caregivers are not familiar with payroll taxes and may have questions. So whether you have a long-time employee or you’re just starting the search process, here are a few things to discuss with your caregiver when you have “the tax talk.”
1. Gross Wages vs. Net Pay
The term “gross wages” refers to the total taxable wages and bonuses paid to your employee. From gross wages, several taxes are withheld—Social Security, Medicare, federal income tax and, where applicable, state income tax. Once these taxes have been withheld from your employee’s pay, the remaining portion is their “net pay,” or take-home pay. To see a list of the taxes you should withhold in your state, visit our Nanny Tax Calculator. Below is a sample payroll scenario to help explain:
Gross Wages: $1,000 bi-weekly ($26,000/year)
Federal Income Tax: $82.50
State Income Tax: $25.38
Total Tax Withholdings: $184.38
Net Pay: $815.62 ($21,206/year)
It’s very important to discuss pay in terms of gross wages, because the federal and state tax agencies require all compensation to be reported this way. If you’re used to dealing with net pay, you can translate it into gross wages by entering the net amount and clicking the “Net Pay” button on our Nanny Tax Calculator.
Please note that the employees’ selections on Form W-4 will affect their income tax withholdings. Our Form W-4 wizard can help employees calculate the proper number of allowances for their personal tax situation.
2. Paying Taxes Protects Your Caregiver
Families that withhold and remit the appropriate taxes from their employee’s pay—and pay their share of employer taxes—can breathe easy at tax time. They don’t need to worry about potentially losing their professional license because of tax evasion charges. They also protect themselves from having wage disputes filed by a former employee. As an added bonus, families with care expenses may be eligible for tax breaks that can offset most, if not all, of their employer taxes.
3. Withholding Taxes Benefits Your Employee
When you pay your employees on the books, you’re helping them both in the short and long run. If you ever have to let them go due to no fault of their own (i.e. your kids get too old for a nanny, you move, etc.), they’ll likely be eligible for unemployment benefits while they search for a new job. They’ll also have a verifiable employment history, which is vital for being approved for loans, credit and healthcare subsidies through the Affordable Care Act. In the long term, your employee will build credit towards potential Social Security income and Medicare benefits in retirement.