The Payroll Blog

News, tips, and advice for small business owners

How Do I Pay My Nanny?

Posted On
4/20/2020
By
Denise Stern

A paycheck laying next to a calendar and calculator.

Hiring a nanny demands not only background checks, interviews, and willingness to negotiate options, but knowing potential tax obligations. State and federal tax requirements and associated forms can be confusing for some and overwhelming for others.

Before you hire a nanny, you need to understand how you’ll pay your nanny, as well as tax obligations referred to as the nanny tax.

How to Pay Your Nanny

When first hiring a nanny or other household employee, you may think that you can just pay them cash under the table. However, this is not the proper way to handle paying your new employee and can lead to negative consequences for both of you. Having a nanny means you are a household employer, and you will be responsible for running payroll.

To begin, you’ll need Form W-4 from your new nanny so you know how much to withhold in taxes each paycheck. Next, you’ll have to establish a payroll schedule: weekly, bi-weekly, semi-monthly or monthly. You’ll need to research the guidelines for your state. While some states let employers choose their payroll schedules, others will be state-mandated. Once you know you’re schedule, you’ll want to give a copy to your nanny so they know when they’ll get paid. Last is determining whether you’ll pay your employee via direct deposit or a printed check. Direct deposit is easiest so your nanny has their funds immediately and you don’t have to schedule a time for them to get their check, but you can agree on a system that works best for both of you.

While that covers how to go about paying your nanny, there is another important component to paying your nanny: taxes. Both you and your nanny must understand their personal tax obligations and follow guidelines determined by your state and the IRS. One of those guidelines defines the difference between a nanny or household worker and an independent contractor.

Know Your Nanny Tax Obligations

Depending on wage thresholds, you might have a legal obligation to pay the nanny tax. For 2020, the annual wage threshold for any single household employee is $2,200, applicable to part-time or full-time nannies or babysitters. All domestic workers are also subject to the same regulation.

If you employ and expect to pay a nanny or another household employee more than $2,200 in cash wages (meaning cash, check, money order, etc.) nanny taxes must be paid by the employer, meaning Social Security and Medicare taxes.

How do you estimate nanny taxes? Calculate 15.3% for Social Security and Medicare taxes. Employers pay a 7.65% share of the tax of the employee’s gross wages (6.2% for Social Security tax and 1.45% for Medicare tax).

The employee also pays 7.65%. Submitting your share as an employer is your responsibility.

If wages meet the threshold, a household employer is also responsible for paying the Federal Unemployment Tax Assessment (FUTA) is based on the nanny’s earnings (usually 6%).

In some cases, nanny employers might also be required to pay State Unemployment Tax Assessments (SUTA). Tax amounts vary between states.

Nannies themselves are responsible for filing their own federal and state income taxes.

Nanny Tax Exceptions

According to the IRS, you not required to withhold federal income tax from wages paid to a household employee or nanny, but you must do so if your nanny requests that you do. This is beneficial for the nanny or household worker, as it reduces their own payment obligations at tax time.

A number of exceptions are applicable to tax obligation rules. For example, you don’t have to pay the nanny tax if your nanny is:

  • A spouse
  • A child of the employer under 21 years of age
  • A parent
  • An employee under 18 years of age
  • If you pay less than $2,200 in cash wages for 2020

Additional exceptions to these rules can be found on the IRS.gov website for Publication 926 (2020 version) of the Household Employer’s Tax Guide. Applicable forms are also available on the IRS website for download.

Nanny vs. Independent Contractor

Another question you may have when figuring out how to pay a new nanny is how to classify them. Similar to classifying employees at a business, it’s important to properly classify your new household employee. Do not misclassify a household employee or nanny as an independent contractor by using a 1099 form. Doing so can result in tax evasion charges.

Nannies are deemed household employees under federal law, which makes a big difference when assessing appropriate filing taxes for them as opposed to an independent contractor. To make things simple, the IRS rules that in nearly all situations, household workers are to be classified as employees.

Per the IRS, nannies’ work hours based on the employer’s need, and procedures and scheduling are discussed and negotiated prior to hiring.

An independent contractor controls when he or she is available to work.

Another difference is that a nanny continues to be employed until they quit, the employer lays them off, or terminates them with cause. Independent contractors are typically temporary and perform duties over a specific time frame and leave when the job, task, or contract is completed.

Bottom Line

As you can see, a lot of work goes into paying your nanny accurately and on time. One way to get help with this time-consuming task is to opt for an online payroll service. A payroll provider will ensure that you are staying compliant with the nanny tax, can be a resource at the end of the year before tax season, and overall ensure that your nanny is being paid correctly.

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This website contains articles posted for informational and educational value. SurePayroll is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, SurePayroll. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. If you require legal or accounting advice or need other professional assistance, you should always consult your licensed attorney, accountant or other tax professional to discuss your particular facts, circumstances and business needs.