Childcare is a complicated situation. If you have kids, you’ve probably considered this. Do you send your kids to a childcare center, do you use an in home daycare, or do you hire a nanny? But do you have to pay taxes for a nanny? And if so, how does it work?
When do you have to pay taxes for a nanny?
If you have a nanny (or any household employee) who makes more than $2300 in a calendar year, you have to pay a combination of state and federal taxes. What are these taxes?
- Taxes withheld from the employee: Social Security & Medicare taxes (FICA), as well as federal & state income taxes.
- Taxes paid by the employer: Social Security & Medicare taxes, as well as federal & state unemployment insurance. (Source)
Some of these are taxes you’re likely familiar with – if you receive a paycheck, you have taxes withheld from your paycheck. But did you know that outside of your income, your employer also pays taxes to employ you? You then also have to pay these taxes when you employ someone in your household, like a nanny.
Do you have to pay taxes for a nanny?
In a word, yes. While you may hear about people who pay their nanny “under the table,” meaning that they’re likely paid in cash and nothing is filed with the IRS, this is really not the smartest plan. Why? Because you would be committing tax fraud if you didn’t pay taxes.
How would you get caught? That can happen in a number of ways. First, if your nanny decides to file income taxes and reports the income, that would alert the IRS. If you and the nanny part ways and they file for unemployment, that would alert the unemployment office that you never paid unemployment taxes. If something happens and your nanny needs to file for disability, that would also be a red flag.
Additionally, it’s to the nanny’s benefit to have taxes paid and not be paid under the table. Proof of income is often necessary for things like renting an apartment or buying a car. It’s also beneficial to have money paid into Social Security when it comes time for retirement. The ability to collect unemployment can be critical. And it also tends to formalize the relationship between employer and employee.
What do I need to do?
If you don’t want to go it alone, there are a number of companies out there who can help you figure out what you need to do to pay household employer taxes for a nanny. You can also speak to a general accountant. If you want to go it alone, here are some starting points.
- File for an Employer Identification Number
- Calculate and track your payroll
- Have your employee fill out an I-9 and W-4
- At tax time, prepare a W-2 for your employee and file a Schedule H with your taxes
- Check into your state specific requirements
These steps aren’t hard, but it’s helpful to have some sort of accounting software to keep track of all of your payments. You may be required to pay quarterly taxes, and an accountant or good software can help you estimate that.
Having someone you trust take care of your kids in your home is an awesome option for childcare, and if you do it right, you protect both yourself and your nanny at tax time.
Megan is a 30-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.