Nanny Taxes

Nanny Taxes: What Every Parent and Nanny Should Know

Taxes. We all hate them, but there is no avoiding them- even in the world of childcare.

Or is there???

Let’s see if you can pass our “Nanny Taxes” test on who doesn’t have to give Uncle Sam a cut!

SCENARIO ONE

Part-time summer nanny who only works 12 weeks while kids are on break. Paid $200/week.

SCENARIO TWO

Part-time nanny who comes every Tuesday so a stay at home parent can get out sans kids for just a couple hours. Paid $35/week.

SCENARIO THREE

Regular date night babysitter who comes almost every Saturday night. Usually paid about $50.

If you are not sure of the answer, read on!

If you feel a little lost when it comes to nanny taxes, you are not alone. According to the International Nanny Association 2017 INA Nanny Salary and Benefits Survey, “67% of household employers are paying their nanny legally…which means that 33% are still paying “under the table”.” If you hire or provide childcare in the home setting, it is on you to understand your responsibility.

We know. It can be a hard pill to swallow. There are just as many reasons why families prefer to pay their nanny in cash as there are reasons why some nannies prefer to be paid “under the table”. This article aims to education both groups on the potential pitfalls of skirting tax responsibilities, as well as the benefits of paying your nanny legally.

Let’s first just put it out there and acknowledge the reasons families and nannies prefer to pay/be paid in cash.

Reasons Families (Employers) Prefer to Pay in Cash:  

  • It’s easier.
  • It’s less expensive for the employer.
  • They may be able to attract a larger number of potential candidates.
  • It’s relatively unlikely they’ll get caught.
  • They can hire an undocumented worker and pay a lower hourly rate

Reasons Nannies (Employees) Prefer to be Paid in Cash:

  • It’s easier.
  • Their weekly take-home pay is larger.
  • They may be eligible for a larger number of positions.
  • If they are undocumented, they can still be eligible for domestic worker positions.

Tempting as these reasons may seem, there are many benefits to both parties in paying “above board”.

Benefits for Employers:

  • By paying nanny taxes, you may be eligible to take advantage of Dependent Care or Childcare Tax Credits.
  • You will be providing your nanny with the piece of mind that she deserves as a hardworking employee.
  • You will have less risk of a potential audit.
  • You will attract and retain better employees (most professional nannies prefer to be paid legally).
  • You will start off your employer/employee relationship on an honest, respectful, and positive note!

To learn more check out Via The Village’s article on hiring a nanny.

Benefits for Employees:

  • By having taxes taken out of your gross weekly pay, you will be eligible for the following:

*Social Security and Medicare benefits

*Worker’s Compensation

*Disability benefits

*Unemployment Insurance benefits

*partially-paid maternity leave (*currently only in the state of New York)   

  • You will be able to establish a work history, which is helpful when you apply for a car or home loan, a credit card, or even a cell phone.  
  • You also may qualify for an Earned Income Credit when you file your taxes.

To learn more, check out Via The Village’s article on how to ace your nanny interview?

I don’t think anyone can argue that paying taxes isn’t the “right thing to do”. And yet, many families and nannies continue to skirt this responsibility, but please beware!

Potential Pitfalls for Employers of Ignoring Nanny Taxes:

  • You put yourself (and your nanny) at greater risk for being audited.
  • If caught, you will be responsible for paying potentially THOUSANDS of dollars in penalties, interest fees, and legal fees.
  • You could GO TO JAIL if you are unable to pay what you owe.

Potential Pitfalls for Employees of Ignoring Nanny Taxes:

  • You put yourself (and your employer) at greater risk for being audited.
  • You will not be paying into Social Security, which could make things very hard for you when you retire.
  • If caught, you will be responsible for paying potentially THOUSANDS of dollars in penalties, interest fees, and legal fees.
  • You could GO TO JAIL if you are unable to pay what you owe.

How to Do It Right. The tax responsibilities of household employers are as follows:

Upon Hire:

  • File Form SS-4 and obtain your EIN (Employer Identification Number).
  • Provide your nanny with Form I-9 and be sure to obtain the nanny’s social security number and home address.
  • Provide your nanny with a W-4 and a State Income Tax withholding form.

Throughout the Year:

  • Each pay period, employers should withhold Social Security and Medicare taxes from the nanny’s paycheck (while it’s not legally required to withhold Federal and State income taxes, it’s advised that family’s cover this expense so that their nanny isn’t left with a huge tax burden at the end of the year).
  • The employer should pay their portion of Social Security, Medicare, FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) taxes.
  • Employers should file tax forms quarterly with their state’s Department of Revenue and the Department of Economic Security, and with the IRS in April, June, September and January.

-or-

** The employer can hire one of the many nanny tax payroll services that are currently in business to handle all of the above for them. You will find a list of reputable companies at the bottom of this article**

End of Year:

  • The employer should prepare a W-2 to give to each household employee. They will also need to file Form W-2 Copy A and Form W-3 with the Social Security Administration.
  • Don’t forget to include Schedule H (the form used to report household employees) with your personal income tax return!

 

To conclude, nanny taxes provide benefits for both the employer AND the employee. Not only is it the law- it’s the right thing to do. I’m sure that none of you reading this would knowingly teach your children (or future children) how to break the law, but that is absolutely what you are doing by skirting nanny taxes.

Parents: If your nanny makes more than $2,100 per year, provide her with a W2, and pay the appropriate taxes for her (social security, disability and unemployment insurance).  Do not give your nanny a 1099, or you may find yourself being charged with tax evasion in the event of an audit.

Nannies: Insist that your nanny families take taxes out of your salary. Do not allow them to 1099 you- you are not an independent contractor if you work in their home and follow their rules, schedule, and guidelines!

Hopefully, this was a nice overview and you now understand that there is only one scenario listed above that would not be responsible for taxes. Check your answer on Via The Village’s community forum.

So there you have it. Please feel free to reach out to kim@viathevillage with further questions or for access to more resources.


Nanny Tax Resources for 2018: