After you’ve invested a great deal of time and energy to find the perfect nanny to care for your children, the last thing you want to focus on is nanny payroll taxes! Calculating, filing and paying your nanny’s payroll taxes can be complex and time consuming. Here are a six tips to help you comprehend nanny taxes and simplify the process.
1. If you pay your caregiver more than $2,100, you have to pay a nanny tax.
Your nanny is considered a “household employee” under the law because you control what work she will do and/or set requirements on how that work will be done. For any household employee that makes $2,100 or more, you need to withhold (and pay) Social Security and Medicare taxes, pay federal unemployment tax, or both.
2. Avoiding nanny taxes can be costly.
Because taxes can be intimidating and confusing, many parents think it’s just easier to skip the taxes all together and pay their nanny “under the table.” Bad idea. Not only is it illegal and easy to get caught, but failing to pay the nanny tax can cost you up to $25,000 in fines and penalties.
3. You’ll need certain tax forms.
To report your nanny’s wages and federal unemployment taxes, you’ll need the following forms:
- Form SS-4: Fill out Form SS-4 or apply online through the IRS to obtain your Employee Identification Number (EIN), which you’ll need for tax forms.
- Form I-9: Have your nanny complete this form when hired to prove employment eligibility. Be sure she shows you the proper documentation.
- Form W-4: If you and your nanny decide to withhold income taxes, she should complete Form W-4 so you know how much to withhold and remit.
- Form W-2: Fill out Form W-2 at the end of the year if you paid Social Security and Medicare wages of $2,100 or more. Give Copies B and C to your nanny. File Copy A (along with Form W-3 with the Social Security Administration. Both need to be done by January 31.
- Schedule H: If you paid your nanny cash wages of $2,100 or more file Schedule H with your personal tax return by April 15.
4. There are some exceptions.
You don’t have to pay Social Security and Medicare taxes if your nanny is your spouse, your child under 21, your parent, or anyone under 18 any time during the calendar year. For more information on exceptions, check out IRS Publication 926.
5. You may get a tax break.
There are significant tax breaks for families employing a nanny. Many families can reduce their tax liability by hundreds or thousands of dollars a year by exploring the following:
- Pre-tax Flexible Spending Accounts: Check with your employer. Many 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.
- Child and Dependent Care Tax Credit: This can provide you with up to 20 percent 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 federal tax return.
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Disclaimer: Sittercity does not advise on any personal income tax requirements or issues. Use of any information from this blog or any other website referred to is for general information only and does not represent personal tax advice either expressed 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.