Nanny Payroll Guide
Like many, there is nothing more important to you than your children. This is why you put so much time and effort into finding the right nanny. With the perfect person in place, it’s time to turn your attention to another detail: nanny taxes.
Calculating, filing, and paying your nanny’s payroll can be confusing, stressful, and time consuming. This often leads to parents skipping this altogether, and instead paying their nanny in cash “under the table.” As tempting as it may be, it’s also illegal. If you make this error, it could eventually cost you up to $25,000 in penalties and fines.
Rather than shy away from doing things the right way, now’s the time to learn more about the nanny payroll process and the nanny taxes you may be required to pay. By learning how to navigate the nanny tax, you can:
- Avoid penalties and fines.
- Protect yourself as an employer.
- Help your nanny build his or her employment history, which is important when it comes to Social Security and Medicare benefits.
- To ensure that your nanny can collect unemployment benefits if/when you no longer need his or her services.
Although there’s a lot to learn, once you have a payroll system in place everything will come together. You’ll no longer be worried about making mistakes that could cost you or your nanny.
What is the Nanny Tax?
In short, the nanny tax is a combination of taxes you pay as an employer and taxes you withhold from your employee’s pay. Each pay period, you’re required to withhold the following:
- Social Security and Medicare, often referred to as FICA.
- Federal income tax.
- State income tax.
You also need to pay a matching percentage of FICA, along with state and federal unemployment insurance taxes.
Important: Income tax rates are not the same from state to state. For example, some states don’t even have income tax. Knowing your state income tax rate will help you better understand your payroll obligations.
Are you Required to Pay Nanny Taxes?
There’s not much gray area in regards to whether you need to pay nanny taxes. If you pay your nanny $2,000 or more in a calendar year or $1000 or more in a quarter the IRS considers you a household employer. For this reason, you’re responsible for paying nanny taxes.
Important: There are certain exceptions, drawn out by the IRS Publication 926. For example, you don’t have to pay Social Security, Medicare and FUTA taxes if your nanny is your spouse, your child under 21 or your parent. Also, if your nanny is under 18 any time during the year you are exempt from Social Security and Medicare taxes.
Information You Need to Pay Nanny Taxes
As somebody who has never paid nanny taxes in the past, you may have several questions about what to do next. The best thing you can do is understand what you need in order to get started. Generally speaking, you can start by collecting these four items:
- Tax identification number: You need a federal and state tax identification number so you can report your nanny taxes. You may not look at yourself as an employer, but you are considered one by the IRS and your state tax agency. You can apply for a federal employer identification number online by visiting this website. For your state, contact the appropriate agency.
- Payroll details: With each period you must calculate your nanny’s gross pay and taxes to withhold, as well as your employer taxes.
- Forms: There are a variety of forms needed to pay nanny taxes. These include but are not always limited to: Form W-2, Schedule H, Form I-9, and Form 1040 (more on these below).
- Quarterly filings: Typically, you’ll make estimated quarterly payments for both federal and state taxes.
Although some household employers opt to handle all these details on their own, others realize that hiring a professional nanny payroll service, such as SurePayroll, can save them time and money. Additionally, it eliminates the chance of making a costly mistake.
Things You Need from Your Nanny
In addition to what you need to pay nanny taxes, there are a few things your nanny should provide:
- His or her Social Security number or ITIN.
- Form I-9 along with valid identification, such as a driver’s license.
- Federal and state income tax withholding form, such as a W-4.
- Don’t feel awkward about asking your nanny for this information. It may be a hassle for them to collect, but in the long run it’s the best way to ensure that both parties are fully protected and following all the rules set forth by the IRS and state tax agency.
A Breakdown of Important Forms
You want to report your nanny’s wages and unemployment taxes. You also need to take care of your portion of the nanny tax. With the right forms in hand, this is easy to do.
- Form W-4. This is a form completed by your nanny that shows how much money to withhold.
- Form I-9. To be completed by your nanny at the time of hiring, this form is for employment eligibility verification. This is also a good time to ask your nanny to provide a copy of his or her Social Security card.
- Form W-2. You are required to complete this form if you pay Social Security and Medicare wages of $2,000 or more. You will send copy A to the Social Security Administration, while providing your nanny with copies B and C.
- Form W-3. To be submitted along with Form W-2 to the Social Security Administration, this shows your nanny’s total earnings, Social Security wages, Medicare wages, and withholding for the entire year.
- Form SS-4. If you don’t apply for your federal Employee Identification Number online, you can use Form SS-4 to do so.
- Schedule H. This form is to be used if you pay your nanny cash wages of $2,000 or more in a calendar year.
- Form 1040. This is included along with other forms required for your federal tax return.
If you are in need of these forms or any others, you can visit the IRS Forms and Publications webpage. It is here that you will find a listing of every available form. All of these can be downloaded and printed free of charge.
Why Pay Your Nanny Legally?
As an employer, you may be tempted to pay your nanny under the table. This is something that many nannies may be okay with, being that they don’t have to pay taxes on their wages.
Even if both parties agree to this arrangement, it is against the law. And even though paying your nanny under the table would result in more take home pay, it means that he or she would miss out on benefits such as:
- Unemployment benefits.
- Medicare coverage upon retirement.
- Social Security income upon retirement.
- A verifiable employment history, which can be used for everything from securing a mortgage to purchasing car insurance.
When you pay your nanny legally, both parties gain access to a variety of benefits. Not to mention the fact that this gives you peace of mind in knowing that you are adhering to all federal and state tax laws.
Use Tax Credits to Your Advantage
All of this may sound like a way for the IRS and state agencies to get their hands on your money. Whether or not you agree with the system doesn’t matter, as you need to follow the law down to every last detail.
Fortunately, there are tax breaks that allow you to save on how much you pay. Consider the following:
- The Child and Dependent Care Tax Credit. With this, you can receive up to 35 percent of your child care costs via a tax credit. If you want to receive this credit, you must file form 2441 and W-10 along with your final federal tax return.
- Pre-tax Flexible Spending Account. Offered by many employers, this gives you the opportunity to contribute pre-tax money to an account that can be spent on child care.
Important: Not all household employers are eligible for these tax credits, so it’s important to check with your tax professional.
The Consequences of Paying Your Nanny Under the Table
At this point, you should have a clear understanding of why it’s important to pay the Nanny Tax. Not only is it illegal to avoid this, but it can result in costly fines and penalties.
Here is a basic example of what could happen: your nanny is employed for several years. From day one, you have been paying him or her cash without ever considering nanny taxes.
At some point down the road, you no longer need your nanny’s services. This prompts her to apply for unemployment benefits, at which time she lists you as a previous employer.
At that point, the unemployment office reviews the application and realizes that you never paid into the state unemployment insurance fund. Soon enough, your nanny is denied benefits and you are audited by the state.
This could result in a variety of consequences, such as:
- Requirement to pay back taxes, including interest and penalties.
- Tax evasion charges.
- Liability for employer and employee portions of Social Security and Medicare taxes.
Not only do you have to deal with consequences on the state level, but things will only get worse once the IRS is involved.
Over the past 5 to 10 years, the IRS has ramped up its investigations into household employers who illegally pay employees and/or misclassify workers as independent contractors. In other words, the IRS is watching.
Is it Really that Much Work?
The first time you hire a nanny you may be overwhelmed by all the details. There are forms to complete, information to collect from your nanny, and payments to be made.
With so much expected of you, it’s imperative to be organized from day one. When you know what you are doing and when you need to do it, you can avoid mistakes that could complicate your situation in the future.
Important Questions to Answer
Now that you have a better understanding of payroll taxes, you should feel more comfortable about your ability to meet all the requirements set forth by the IRS and your state tax agency.
Here are five questions to address early in the process:
- Have you completed all the necessary employer forms?
- Have you collected the required information from your nanny?
- Are you going to handle your own payroll taxes or hire a professional provider?
- Do you know how to setup an account with a payroll service?
- Do you have a system in place for preventing future mistakes?
By addressing these questions early on, you won’t find yourself looking back and wondering what went wrong.
SurePayroll Gives You Total Control
Are you wondering how you will ever stay current with nanny taxes? In this case, the best thing you can do is hire a payroll provider. SurePayroll is organized, flexible and under your control. With SurePayroll you’ll:
- Finish payroll online in minutes in just 3 steps on any device, at any time.
- Get federal, state and local payroll taxes and your 1040-ES automatically filed on your behalf, plus a signature-ready Schedule H to attach to your annual 1040.
- Experience our award-winning U.S.-based customer care team that’s here 6 days a week by phone, email or live chat.
- Never get charged for setup fees or extra services you don’t need.
We hope this guide provides you with all the information you need to make informed decisions regarding nanny payroll.
Visit this page if you want to learn more about our nanny payroll services. From there, you are only a few clicks away from getting the professional help you have been looking for.