Navigating Nanny Taxes
First off, congratulations for having the bravado to read an article on nanny taxes. We know that it can be an intimidating topic, complicated by endless numbers, confusing forms, the possibility of different payment and filing due dates, ambiguity and plain old fear. But relax. We're going to take this slow, and we're going to be very clear about what you need to do (and what you don't!) to make sure you're following every letter of the law.
So before you get buried in tax forms and overwhelmed by legal jargon, read below. Let's navigate the confusing world of household employment tax law so that you can stay on top of payments and on the good side of the IRS.
Disclaimer: Sittercity does not advise on any personal income tax requirements or issues. Use of any information from this site or any other website referred to is for general information only and does not represent personal tax advice either express or implied. Many variables can affect your tax issues and tax laws change frequently. You are encouraged to seek professional tax advice for personal income tax questions and assistance. Some links to professional tax agencies are also provided for your convenience.
Why bother with taxes?
A lot of parents believe that paying a nanny "under the table" will save everyone a lot of time and paperwork. Even if that were always the case (it's not), remember that it's also illegal. Even though that legal stuff might make you break out in a sweat, think of this responsibility in a positive light: Employers pay taxes and other expenses often because it translates into greater peace of mind for you and your employee, and promotes loyalty between both parties. And remember, the money you pay in smaller amounts each quarter is pennies compared to what you could end up owing in back taxes if you try to skirt around the law.
Nanny taxes made simple: Sittercity has partnered with SurePayroll, which manages your nanny's taxes and pay online so you don't have to!
Not only can nanny taxes be quite easy to manage with a SurePayroll account, but nannies should also WANT to be paid legally for a few reasons:
- Employment history. A legitimate employment history is required for a car loan, a mortgage, a student loan, a credit card application, a health insurance application, an auto insurance application, future job applications, etc. Paying under the table means that a nanny's income won't get counted which may prevent her from qualifying for a loan.
- Social Security and Medicare benefits. Without that nest egg building up through taxes, some nannies may find themselves in the position of not being able to afford retiring from the industry.
- Unemployment benefits. Unless you plan on having children forever, you'll eventually have to let your nanny go. When she's looking for new work, she can receive unemployment benefits to help her in the meantime.
Understanding your nanny's tax status
Under federal law, your nanny is considered a "household employee." Makes sense -- she works in your house, after all. According to the IRS, you have a household employee if you control what work she will do or set requirements on how that work will be done. And because you've never let a person into your home to care for your child in any manner she chooses, you ARE indeed controlling how the work will be done.
Determining which taxes you must pay
For any household employee, you may need to withhold (and pay) Social Security and Medicare taxes, pay federal unemployment tax, or both. So how do you know which to pay? It all comes down to income -- your nanny's income, to be exact.
If you pay your nanny $1,800 or more in 2013, you must withhold and pay Social Security and Medicare on all her wages over $1,800.
If you paid your nanny $1,000 or more in quarter in 2013, you must pay the federal unemployment tax, or FUTA. (You may also owe state unemployment taxes.)
Keep an eye on your nanny's wages so you can collect Medicare and Social Security taxes on any income above $1,800 and be prepared to pay the correct FUTA taxes.
Are there any exceptions?
Uncle Sam does make a few exceptions, all of which are outlined in IRS Publication 926 if you're feeling very ambitious.
You're not responsible for collecting and paying any Social Security and Medicare taxes in 2013 if your nanny is:
- Your spouse
- Your child under age 21
- Your parent
- Under 18 any time during 2013
- Your spouse
- Your child under age 21
- Your parent
As far as the FUTA taxes are concerned, you're off the hook if your nanny is:
It's important to remember that if your nanny is under 18 and exempt from the Social Security and Medicare taxes, you've still got to collect FUTA taxes if you pay here more than $1,000 in a quarter.
Paying Social Security and Medicare
Both you and your nanny may be responsible for paying Social Security and Medicare. Usually you'd both pay the same amount, but for 2013 your nanny tax rate is 6.2% for Social Security and 1.45% for Medicare. While you're deducting a total of 5.65% for your nanny, you'll have to cough up 7.65% that's 6.2% for Social Security and 1.45% for Medicare, in case you want a breakdown.
EXAMPLE: So, if your nanny makes $100 each week, you should withhold $7.65 from each paycheck and pay your nanny the remaining $92.35. You'll then contribute $7.65 of your own money to pay your share of the taxes.
ALTERNATIVE PROCESS: If you don't want to pay these taxes from your own funds, you can follow a different arrangement. Let's say your nanny makes the same $100 a week in our last example. Instead of withholding any funds, you choose to pay your nanny her full $100 each week.
- For tax purposes, the $100 is still your nanny's wages each payday. So for each wage payment, you will pay $15.30 (your nanny's $7.65 plus your own $7.65) when you pay taxes.
- For income tax purposes, your nanny's wages each payday are $107.65 (her original $100 plus the $7.65 that you pay to cover her taxes).
Paying Federal Unemployment Tax (FUTA)
The FUTA tax amounts to 0.6% of FUTA wages. "FUTA wages" are only the first $7,000 of your nanny's cash wages during the year (so, yes, there's a cap on it -- phew!). The thing about the FUTA tax is that you must pay it entirely from your own funds. No withholding allowed.
EXAMPLE: Say you pay your nanny $200 each week. This makes her first quarter wages (January - March) come to a total of $2,600, which is more than the $1,000-per-quarter limit we discussed earlier. So you will be paying FUTA taxes. At $200 per week, your nanny's annual salary is $10,400. But, remember, you only pay the 0.6% on the first $7,000 of FUTA wages, meaning you only pay a grand total of $42 for FUTA taxes.
So How Do I Make These Payments?
Once you know what you owe, you need to know how to pay it to our dear Uncle Sam. When you file your federal income tax return, attach Schedule H to your Form 1040. Schedule H will help you figure out your TOTAL household employment taxes, which you will then add to your income tax. Pay the amount by April 15!
If you or your spouse owns a business, you can also include your nanny's taxes in your business tax forms. This way you don't have to go through the hassle of attaching Schedule H to your 1040.
What forms do I need to file?
To report your nanny's wages and those federal unemployment taxes, you'll need certain tax forms.
- Form SS-4: On tax forms, you'll have to include your Employee Identification Number (EIN). But, since you're reading this, it's safe to assume that you don't have an EIN yet. No worries! Just fill out Form SS-4 or apply online through the IRS. (By the way, it's more secure to use an EIN than your Social Security number on forms you might lose!)
- Form W-2: : If you pay Social Security and Medicare wages of $1,800 or more, fill out Form W-2 and give Copies B, C and 2 to your nanny. Copy A (along with Form W-3) goes to the Social Security Administration.
- Schedule H: If you pay your nanny cash wages of $1,800 or more, file Schedule H.
If you're running a business, just tell your accountant about your nanny situation. He or she will know which forms to add your nanny to.
Note: Right when you hire a nanny, have her show you her Social Security card and complete a Form I-9, since you'll need to record her Social Security number for tax purposes.
NERVOUS ABOUT NUMBERS?
In case you almost felt your head explode just reading any of those above paragraphs, check out this nanny tax calculator that can show you withholdings and wages in real, relevant numbers.
Tax Credits Can Help!
Who would have thought that reporting taxes could actually save you money? It's true! A tax credit is not a deduction; instead it directly reduces the amount of tax you owe the IRS at the end of the year. Many families find that their tax liability can be greatly reduced by anywhere from $250 to $1,200 per year by exploring two avenues.
- The first avenue is checking with your employer about "pre-tax flexible spending accounts." Some companies offer these accounts (sometimes called "cafeteria plans"), which allow employees to contribute a certain amount of their pre-tax salary if it will be spent on qualifying payments like child care.
- The second option is a federal program called the Child and Dependent Care Tax Credit, which can provide you with up to 20% of your child care costs in the form of a tax credit. To receive this credit, you must include Form W-10 and Form 2441 with your annual Federal tax return.
There are restrictions on both of these options according to federal law, so check to see if you qualify before banking on the extra cash.
Want to learn more about how SurePayroll assists with nanny taxes and special pricing for Sittercity members? Check out this link:
HOW SUREPAYROLL CAN HELP
If nanny taxes still make you nervous or sound like a lot more time than you want to spend on paperwork, SurePayroll can help. How?
- Save time. SurePayroll pays and files all the nanny tax paperwork on your behalf. Plus SurePayroll's direct deposit is instant, paychecks can be printed at any time and all payroll info is accessible online 24/7.
- Save effort. SurePayroll makes all the calculations, including taxes, benefits, paycheck deductions, bonuses and more.
- Save headaches. If you ever receive a nanny tax notice from the IRS, SurePayroll will take care of it on your behalf.