Congratulations! You found the perfect nanny for your family through Sittercity. Now it’s time to make payday and tax time a breeze. Getting nanny taxes and pay right can be complicated. The IRS estimates that it can take a household employer 60 hours a year just to comply with all the tax, wage, and labor laws surrounding domestic employment.
Skipping your nanny tax obligations and paying “under the table” shouldn’t be an option. It’s easy to get caught and you’ll wind up paying much more in fines, penalties, and back taxes. Failing to pay employment taxes can cost, on average, $25,000 in penalties and interest.
Here are a few reasons why you’ll want to set up your nanny taxes the right way:
- You’ll attract higher-quality candidates because you’re showing them upfront that you see them as a professional. This will lead to a stronger work relationship, a more satisfied employee, and a happier family.
- Without required workers’ compensation insurance – or choosing voluntary coverage – your employee can sue you for lost wages and medical costs if they’re hurt on the job.
- You can take advantage of tax savings through your employer’s Flexible Spending Account (FSA) and/or the Child and Dependent Care Tax Credit and potentially save thousands of dollars in taxes.
- Most importantly, you will enjoy peach peace of mind. You’ll have little worries about fines, penalties, lawsuits, or audits.
For your nanny:
- Your employee will appreciate the benefits and protections of being paid legally—such as Social Security and Medicare.
- They’ll have a verifiable income and legal employment history, which is important when applying for a loan, mortgage, or even a credit card.
- By treating them like a professional, they’ll have higher job satisfaction.
- They’ll receive unemployment benefits if you need to let them go through no fault of their own.
- They’ll potentially be able to be eligible for a healthcare subsidy.
Sittercity has partnered with GTM Payroll Services to help you remove the risks, hassles, and worries from nanny taxes and payroll. GTM handles the time-consuming administrative tasks of nanny taxes and payroll while leaving you in control to easily make any changes at your convenience.
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 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.
Understanding the Nanny Tax
By law, a nanny is considered an employee and not an independent contractor. You control the work that needs to be done and your nanny’s schedule while dictating how the work will be performed.
That means you may need to withhold taxes from your employee’s wages and pay your share of employer taxes.
If you pay cash wages of $2,100 in 2019 (or $2,200 in 2020):
Your nanny pays:
6.2 percent of wages for Social Security and 1.45 percent for Medicare – for a total of 7.65 percent – is withheld from their pay. You can choose to pay this yourself and not withhold.
7.65 percent of wages toward Social Security and Medicare (FICA)
Do not count wages if your nanny is a spouse, your child under age 21, parent, or any employee under the age of 18 at any time during the year.
If you pay cash wages of $1,000 or more in any calendar quarter:
6 percent of cash wages for federal unemployment tax (FUTA) on the first $7,000 in wages. This is paid entirely by you only. No withholding is allowed.
You may owe state unemployment taxes (SUI)
Do not count wages if your nanny is a spouse, your child under age 21 or parent. However, you’ll still need to pay this tax on wages paid to employees under 18.
Nanny Tax Example
Your nanny works 40 hours/week at $12.50/hour making their gross pay $500/week. You’ll withhold $38.25 for FICA from their pay. Their take-home pay is $461.75. You’ll also contribute $38.25 for FICA.
At that same rate of pay, your nanny will make $4,500 in the quarter. That exceeds the FUTA exemption limit. Even though their annual pay is $26,000, you’ll only pay FUTA on the first $7,000. At six percent, that’s $420 for the year.
Filing to Become an Employer
Form SS-4 (Application for Employer Identification Number)
Household employers must have an employer identification number (EIN). This gives you a specific tax number, like a Social Security number for employees, for dealing with the IRS and other agencies.
New Hire Report
You must register any new employee with your state in a certain time frame of the hire date. The report asks for basic identification information for each new employee.
Unemployment Identification Number
You are required to obtain an unemployment identification number with the state where the physical work will be performed. This is needed to pay state unemployment taxes on a quarterly basis.
Form I-9: Employment Eligibility Verification
Household employers must obtain a completed I-9 for every employee hired. This is used to verify the identity and employment eligibility of your employees.
Form W-4 (Employee’s Withholding Allowance Certificate)
This form documents how much income tax is to be withheld from your employee’s salary if you and your worker agree to withhold income taxes.
Reporting and Filing Taxes
To file quarterly, use this form to estimate employee federal income tax, employer and employee Social Security and Medicare taxes and the employer federal unemployment tax.
Provide this form to your employee by January 31. File your copy of the W-2 with the Social Security Administration by the same date.
This is a reconciliation of all W-2s for each employee, even if you have just one worker. File this form with your copy of the W-2.
This annual reconciliation of federal taxes should be attached to your personal tax return.
Tax Breaks for a Family Household
Flexible Spending Accounts (FSA)
Your employer may allow you to make pre-tax contributions to an FSA. These funds can be used on qualifying expenses like your nanny’s pay.
Child and Dependent Care Tax Credit
You can claim up to $3,000 of qualifying child care expenses (such as your nanny’s pay) paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals. The 20 percent credit on these expenses can save you $600 for families with one child or $1,200 if you have two or more children.
How GTM Payroll Services Makes Nanny Taxes Easy
As you can see, there is a lot that goes into paying a nanny the right way. It’s complex, confusing, and time-consuming. And time better spent with your family.
That’s where GTM Payroll Services comes in. Our team of household employment experts will:
1. Set you up as an employer with the IRS and state agency
2. Automatically process your nanny payroll and calculate deductions and withholdings each pay period
3. File your taxes on time, every time – 100% guaranteed*
4. Help keep you compliant with federal and state regulations
5. Prepare your year-end tax forms, including Schedule H, W-2 and W-3
You have secure, online access to your account to make changes at your convenience. Or we can do it for you with an email, phone call, or live online chat. They’ve been doing this for nearly 30 years and can help with any question or task.
Your employee can enjoy a direct deposit at no extra charge to you. That makes payday even easier! They’ll also have online access to their paystubs and W-2.
GTM offers workers’ compensation insurance, which is a requirement for a household employer is many states. GTM will obtain quotes, apply for coverage, and handle audits, claims, and invoices.
Thinking about benefits for your employee like health insurance or a 401k plan? GTM does that too!
* GTM GUARANTEE: If you receive a notice from the IRS, or any other tax agency, based on a filing that GTM Payroll Services made, we’ll work with the agency on your behalf to resolve the issue. If we’re at fault, we’ll pay all the associated penalties and fines.