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How to manage a pay raise or bonus for your household employee

Know how a one-time bonus or permanent change to payroll will affect your employee’s taxes

When your nanny or senior caregiver exceeds your expectations, you should reward them. That means, among other things, offering a formal approach to bonuses and raises. Just like other working professionals, your household employee should receive an annual review, which results in the possibility of a raise — even if it’s just a cost-of-living adjustment to keep up with inflation. 

“If you really like your caregiver, a one-time bonus or a raise lets them know how much you respect and value the work they do,” says Eva MacCleery, Director of Care.com HomePay. “In our experience, families that treat their household employees with this kind of professional respect enjoy much longer and happier employer-employee relationships.”

Handling payroll for a one-time bonus

According to the latest International Nanny Association survey, about 60% of families give their caregiver a holiday or year-end bonus with a median value of approximately $600. It’s important to remember that any kind of bonus (holiday bonus, anniversary bonus, performance bonus, etc.) is considered part of your caregiver’s compensation and is subject to taxes. The easiest way to manage a bonus payment is to simply add the bonus amount to your caregiver’s upcoming paycheck and then calculate the appropriate taxes based on the new total.

One question we’re often asked by clients is whether or not it is legal for a family to give an employee a bonus and avoid taxes by calling it a gift. Anyone can gift money or other items of value to another individual and have it be non-taxable, up to an annual limit. However, the gift law does not apply to employment situations. Any item of value if given to an employee is considered taxable compensation and must be reported as such.

How to prepare for giving your caregiver a raise

If your caregiver has exceeded expectations and deserves a bump in their annual pay, it’s important to understand how that will affect your care budget. As a general approximation, the household employment taxes you will pay is around 10 percent of your caregiver’s gross (before tax withholdings) wages. That means you need to be prepared to re-calculate how much your caregiver will ultimately be paid and the additional taxes you’ll accrue each week. Give HomePay a call and we can do this work for you — or you can use our calculators to crunch the numbers yourself.

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