In part 1 of Elevating the Childcare Industry we learned about the childcare crisis. How it exceedingly affects families and nannies but also how they often contribute to the problem. Skirting nanny taxes devalues the childcare industry and childcare providers.
In this article, we will learn about how to be a part of the solution. We will learn about professional pay. Not just to avoid back-taxes, penalties and other consequences, but because it elevates the childcare industry and empowers childcare providers. Professional pay includes nanny taxes.
I know from firsthand experience that nanny taxes can be confusing. When we hired our first nanny, we were steered wrong even by experienced CPAs. I later learned there are many nuances of nanny taxes that trip up even seasoned pros. I strongly advise you seek tax advice only from those well-versed on the topic at hand.
To answer common questions from our community, we went straight to the industry leaders who share our interest of elevating the childcare industry. Jay Schulze, President of HomeWork Solutions answers our questions on nanny taxes.
Who is required to pay nanny taxes?
Anyone employing a nanny, or other household employee, and pays them over a certain threshold. State laws can vary a little but generally you will have state taxes due if you pay $1,000 or more in a calendar quarter. Anyone who pays $2,100 or more in a calendar year will owe federal employment taxes (aka “Nanny Taxes”). It is possible to owe state tax and not federal, but if you reach the federal threshold you will also need to pay state taxes.
If the nanny works for other families in the neighborhood too, couldn’t they be considered an independent contractor and receive a 1099 rather than W2?
Not likely. The IRS is very clear about who can be considered independent and who can’t. It all comes down to who controls the work being done. For example, let’s say a nanny works for Family A Monday and Tuesday, then Family B Thursday and Friday. Both families will have set hours the nanny needs to work with particular tasks that need to be done. If the nanny can’t send another person in their stead, come and go as they please, and care for the charge(s) in any way they please, then they are being directed and are not independent. Just like anyone working two part time jobs that may total a full 40-hour work week, the nanny has two employers.
In 25+ years in the business we have yet to see a parent willing to grant true independence to a nanny. If you want to get extra technical about it, you can submit an IRS Form SS-8 and they will tell you if your nanny is independent or an employee (hint: it’s going to say employee…).
How much additional cost should families budget for to cover their portion of nanny taxes?
There are two potential answers to this one. Social Security and Medicare (collectively known as FICA) taxes are an employer responsibility but the employer can choose to split the cost with their employee. If the family chooses to split the tax they can figure their taxes to be 10-12% of the nanny’s gross wage. If they choose to pay the whole FICA tax obligation themselves they would need to budget for 18-20% of gross wages. Those percentages include both FICA and unemployment taxes and it is more common to do the split option.
On average, what percent of income do nannies pay in taxes?
This one is more of a personal tax accountant question. The answer will vary depending on marital status and income level, inclusive of other personal income outside of their nanny job. Federal income taxes are likely to be in the 10-22% range depending on tax bracket, and there may be state taxes to consider as well.
Are there any special considerations surrounding taxes and nanny shares?
Yes! Nanny shares are a great way to reduce cost and still afford a top-notch nanny. The complication is that a nanny’s withheld income tax needs to be based off the total amount they make, across both employers. For example, if a nanny is making $14 per hour ($7 per hour from each of the two families in the share), the withholding calculations would be based off the $14 per hour then the amount withheld would be split. This is because taxes are not a linear calculation so taxes on $14 per hour aren’t necessarily double those on $7 per hour.
Are there any tools available to help calculate withholdings?
We have a free online calculator available at https://calculator.homeworksolutions.com/.
What information does a nanny need to provide to their nanny employer?
The two main forms are the W-4 and the I-9. The W-4 tells the employer how the employee would like taxes withheld. Basically it gives the employer the variables needed to do withholding calculations. The I-9 is the form that proves a workers eligibility to work in the United States. There may be other forms required, such as a Direct Deposit form for the employee’s paycheck deposit or a background check authorization.
What responsibilities does the nanny employer have to the nanny?
On the federal level there is the Fair Labor Standards Act (FLSA) that dictates federal requirements for the employer/employee relationship. There are also state laws and sometimes even county or city laws. You may live in a state with a Domestic Workers Bill of Rights, as they are becoming more popular with each passing year. For specifics about your state, check out our tip sheets at https://www.homeworksolutions.com/knowledge-center/household-employment-rules-by-state/
What services does HomeWork Solutions offer?
We are your partner in household employment. We offer payroll and tax filing services, but we are happy to help with other employment related topics. We offer free consultations to anyone who would like to know more about their situation, employer or employee!
More specifically we offer two service levels, Complete Payroll and Essential Payroll. With Complete Payroll we take everything off your shoulders, all you have to do is either report the hours worked at the end of each pay period or set up an automatic payroll. We handle everything else. With Essential Payroll we give you the tools to help you pay your employee directly and then we handle the tax filings for you on a quarterly basis.
HomeWork Solutions has generously offered Via The Village a perk! Just mention you are a member and they will waive their enrollment fee for you! We chose to form an affiliate partnership with HomeWork Solutions because they are truly a quality company. They have been around for over 25 years and have collected immense knowledge.
If you have any additional nanny tax questions, we highly recommend you call them 1-800-626-4829. They are thorough and will help you get on track.
Thank you, Jay Schulze and HomeWork Solutions, for answering our questions. And thank you to our community for learning, for being socially responsible, and doing your part to elevate the childcare industry!
We go beyond connecting families, nannies, and nanny shares- we invite you to find community!