The Payroll Blog
News, tips, and advice for small business owners
Top 5 Nanny Payroll Mistakes
When it comes to payroll and taxes, it’s really easy to make mistakes along the way. While some of those mistakes may not have major consequences, others can be extremely costly and time-consuming to fix.
If you have a nanny, caregiver, housekeeper, or another household employee, it’s important to get payroll right and understand everything that goes into nanny payroll. Below we explain the top nanny payroll mistakes, and how to avoid them.
Mistake #1: Failing to Understand the Nanny Tax
Why it’s a problem: The nanny tax refers to the payroll taxes you are required to pay and withhold when handling payroll. Despite the name, the nanny tax covers all types of household employees, including caregivers, private teachers, chefs, and housekeepers. Failing to accurately pay the nanny tax can result in hefty fines, up to $25,000 in some cases.
How to fix it: Get comfortable with what the nanny tax means and understand your responsibility as a household employer. For 2021, if you pay your nanny $2,300 or more in the year, you must withhold and pay Social Security and Medicare taxes on all wages. Additionally, if you pay your nanny or household employee $1,000 or more in a quarter in 2021, you must pay FUTA and potentially state unemployment taxes.
Mistake #2: Paying Cash Under the Table
Why it’s a problem: Everybody likes cash, and when it comes to paying employees it’s easy. However, building on mistake #1, when you pay your household employee cash under the table you’re failing to pay the nanny tax.
How to fix it: While cash isn’t the best option when it comes to payroll if you’re going to pay your nanny or household employee with cash wages, make sure that you’re following the proper nanny tax guidelines. Pay and withhold the proper amount of taxes before handing over cash.
Mistake #3: Misclassifying Your Household Employee
Why it’s a problem: There are two types of workers: W-2 employees and 1099 contractors. If you classify your household employee incorrectly, it can mean problems for their income taxes, and cause problems for you as an employer.
How to fix it: When onboarding your new household employee, ensure that you’re classifying properly. Any household employee needs to be considered a W-2 employee for a few reasons. Employees are told the type of work they will be doing, sometimes how to do it even if they have some freedom, and are often paid a salary or hourly wage. Contractors have more freedom in how and when work gets completed and tend to be paid per project. When hiring a nanny, private teacher, or another household employee, you’ll be telling them what needs to be done, such as picking up kids from school, and paying regular wages for hours worked.
Mistake #4: Not Being Prepared for Taxes
Why it’s a problem: As a household employer, you have a few to-do list items when it comes to taxes. Failure to provide your employee with the proper documents, like Form W-2, on time can cause problems when they are trying to file income taxes. Additionally, you have your own income taxes to account for and need to have the proper paperwork.
How to fix it: Plan ahead. As we mentioned with mistake #3, your household employee is considered a W-2 employee and they need to receive Form W-2 by January 31st so they can file income taxes. As a household employer, you need to show the government the wages you paid your employee. Schedule H, Household Employment Taxes, is the form that you’ll use to report household employment taxes to the IRS. If you file personal income taxes, you can attach Schedule H to Form 1040. While hanging onto tax documents is best practice, with Schedule H it’s required that you should keep copies for at least four years.
Mistake #5: Following a DIY Approach to Nanny Payroll
Why it’s a problem: We conducted a survey with small business owners to learn how they feel about payroll and taxes, and one thing we learned is that 32% of business owners surveyed have made a mistake on payroll. As we said in the beginning, some payroll mistakes can be easy and painless to fix, but others can be costly to fix and cause employees to lose trust. In addition to mistakes, DIY payroll can be time-consuming.
How to fix it: An online payroll service that has support for nanny payroll is a great option for busy household employers. However, not all nanny payroll services are created equal and it’s important to do your research. You should look for how they handle payroll and taxes, options for getting help from customer service, and the ability to run payroll on the go with the help of a mobile payroll app. You want to make sure that you’re getting accurate and secure help when paying your employees.
As you navigate your journey as a household employer, the best thing you can do is stay organized. If you stick with a DIY payroll approach, make sure you’re setting aside enough time to focus on getting payroll right and have the time to research changing tax laws and regulations. If you do find yourself wanting a little extra help with nanny payroll, opting for an online payroll service or accountant can help you stay compliant in the eyes of the government and rest easy knowing your employee is being paid accurately and on time.
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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.