When you think of nannies, senior caregivers and other household employees, you probably think of someone working year-round in a family’s home. But what if your nanny only works for you part of the year — say during the summer when the kids are out of school? Do you still need to pay taxes? Or what if you employ three senior caregivers over the course of the year? Do you need to put them all on payroll?
The fact is, household employment payroll and taxes rules have nothing to do with the amount of time for which you employ a caregiver — they factor only in terms of how much you end up paying him or her. If you pay your caregiver $2,300 or more in a calendar year, you’ll have federal tax responsibilities. Take a few minutes and learn a little more about how the IRS says you should manage a temporary caregiver.
The $2,300 annual threshold triggers federal tax responsibilities
If you never pay your caregiver $2,300 or more during the course of a calendar year, you’re not legally responsible for withholding or paying any federal taxes as a household employer. However, your caregiver is still responsible for claiming any income earned and paying income taxes on their own personal income tax return, so both of you should be keeping track of the payments.
Even if you don’t have to withhold taxes, you may have to pay unemployment insurance taxes
If you pay your nanny (or several caregivers combined) a total of $1,000 or more in a calendar quarter (January to March, April to June, July to September or October to December), you’ll owe federal and state unemployment insurance taxes. Three states have even lower quarterly thresholds: California ($750), Washington, D.C. ($500) and New York State ($500). You’ll need to file the appropriate state unemployment insurance tax return and also file a Schedule H to account for these taxes on your personal income tax return.
You should assume your caregiver will cross tax thresholds
You never know what will happen in the future. You could hire a nanny for the summer and love her so much that you keep her for the rest of the year. Or a part-time caregiving job could turn into a full-time need.
To make it easy on yourself, assume you’ll pay your caregiver more than $2,300 in a year. The amount adds up quickly and it’s a lot easier to start withholding taxes up front than to go back and try to account for taxes retroactively. Keep detailed records so you know how close you are to reaching the threshold. And if you never hit that $2,300 mark, you can just write your caregiver a check to reimburse any taxes you withheld.
Tax breaks are available regardless of how much you pay
No matter how much you pay a temporary caregiver or summer nanny, you may still be able to take advantage of tax breaks to save you money. If you have a Dependent Care Account through your employer, your caregiver’s wages can be applied to it using a form supplied by your HR department. This can save you hundreds or thousands of dollars.
Alternatively, you can take the Child or Dependent Care Tax Credit and claim your caregiver’s wages on IRS Form 2441 when you file your personal income tax return. You’ll need some personal information from your caregiver to complete the form, so explain why you need it while they are still working for you, rather than waiting until tax time.
* 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.