Hiring a nanny requires a family to become an employer, pay taxes, and extend their insurance coverage to include a domestic worker. There are countless service providers able to automate and help with these tasks. The US Nanny Association lists payroll businesses on its website that are organization members of the Association and thus agree to the Code of Ethics and Professional Conduct. It may sound complex but legally employing a nanny does not have to be overwhelming.
The Nanny Tax is a hot topic as Laura Saunders reports in the Wall Street Journal article, You’re Not the Only One Who’s Not Paying Your ‘Nanny Tax’. One economist estimates that only 5% of Americans who should be paying the ‘Nanny Tax’ are doing so and recently, a number of prominent Americans have been caught.
How to Pay Nannies and Taxes
If you compensate a household employee, in this case, pay a nanny more than $2,300 in 2021 or $2,600 in 2023, then you are a legal employer, and the nanny is a household employee.
Household employees are not independent contractors. Families that misclassify their nanny as an independent contractor by providing a Form 1099 can be charged with tax evasion. Fines for avoiding nanny taxes are significant, averaging between $25,000 to $100,000 and could include jail time. Not only do you risk legal consequences, but not paying a nanny legally denies the nanny a credit history, paystubs that may be required to rent an apartment or purchase a car, and cheats them out of social security and unemployment benefits.
- Get a federal and state EIN. A Federal Employer Identification Number (EIN) is obtained by visiting the IRS website. You then use the federal EIN to obtain a state EIN, when required, from the appropriate tax agency in your state.
- Check the nanny’s eligibility to legally work in the United States. Complete IRS Form I-9, the Employment Eligibility Verification form, within 3 days of hiring your nanny and keep copies of the government-issued identification(s) for your records. The nanny should provide a social security number or Individual Taxpayer Identification Number (ITIN).
- File a New Hire Report and Submit for an Unemployment Number. States require that all hires are reported and there are time limits mandated by each state. Visit your state’s local employment website to understand how many days are allotted to report a new hire, the process to file a new hire report, and how to get an unemployment number for the employee. The unemployment number is required to pay unemployment tax.
- Have the nanny complete a Federal W-4 form and the corresponding state income tax withholding form if you live in a state with income taxes. The form is also known as the Employee’s Withholding Allowance Certificate and is needed to determine tax withholdings.
- Calculate the taxes owed based on the nanny’s gross pay. Federal and state tax requirements are provided in IRS Publication 926.
- Taxes withheld from the employee include Social Security and Medicare taxes (FICA) as well as federal and state income taxes
- Taxes paid by the employer (family) include Social Security, Medicare taxes (FICA), federal and state income tax, and state unemployment insurance.
Your tax obligations will vary depending on your state as not all states have income tax while other states require additional taxes be withheld such as disability or workman’s compensation.
Live-out nannies are legally required to be paid minimum wage and overtime rates for hours worked over 40 in a 7-day period. Live-in nannies must also be paid minimum wage and in some states, like Massachusetts, are also entitled to overtime.
- Set up a payroll and documentation process that complies with Federal and State Labor laws. It is the employer’s responsibility to ensure the nanny receives a W-2 form by January 31st of each year. In addition to filing a W-2, you will need to file a W-3 form to the Social Security Administration by February 28th of each year.
- File taxes. Typically, you will need to file state tax returns quarterly, but some states require monthly filings while others accept annual filing. Check the requirements for your local area. You can learn more from the 2021 IRS Household Employer’s Tax Guide.
Benefits of a Payroll Service
If searching state laws and paperwork is not your gig, consider using a payroll service. Many providers are available that can help with weekly or monthly payroll. Payroll services will prepare pay stubs and year-end tax forms to help ensure you are compliant with federal and state labor laws.
Fees for payroll services vary and often include a set-up fee of around $100. Services can include filing new employee forms, calculating and withholding deductions, automatically processing earned wages through direct deposit, and compiling tax forms. Reputable payroll providers charge between $75-150 per month for family employers and small businesses.
Flexible Spending Accounts
If your employer offers a Flexible Spending Account (FSA), you can set aside up to $5,000 of your pre-tax earnings to pay for child care, including nanny wages and taxes. Depending on your tax rate, an FSA contribution can shave up to $2,300 a year. If you qualify, you can claim the Tax Credit for Child or Dependent Care. This deduction, depending on your tax rate, can save between $600 and $1,050.
Do You Have Enough Insurance Coverage?
You likely invest in auto, homeowners, and other types of insurance to protect your family and finances. Now that you have a domestic employee, or a nanny, working in your home, you should consult a reputable insurance agent. Here are a few things to review with an insurance specialist.
- Liability Insurance. Homeowners’ liability insurance provides coverage for bodily and personal injury inside your home. Depending on the policy, persons injured while working in the home will not be covered. Personal umbrella policies provide additional insurance to your homeowner’s policy.
- Worker’s Compensation. If not already required by your state, consider investing in worker’s compensation in the event your nanny gets injured on the job. Worker’s compensation plans can protect your family financially as well as provide benefits to an injured nanny. Without a worker’s compensation policy, you may be personally liable for any damages sustained by the nanny working as your employee. Common injuries include falls, dog bites, and cutting food.
To view workers’ compensation requirements in your state visit
https://gtm.com/household/resource-center/workers-comp- requirements/.
- Auto Insurance. If the nanny is going to drive your car, add them to your insurance policy. By having her on the policy, if the nanny is in an accident, the policy will cover the damage. If the driver is not listed on the policy, the insurance may not pay the claim.
If the nanny will be driving the children in their personal vehicle, you should pay a mileage reimbursement to cover gas, insurance, and maintenance. It is appropriate to ask about their insurance coverage and if you want additional coverage, including medical cost coverage for passengers, it may be appropriate for you, the employer, to provide additional funding to cover the extra insurance. The nanny should also inquire about converting the insurance from personal use to business use as laws vary by state.
- Health Insurance. Providing health insurance or compensation to support a nanny’s ability to pay for health insurance is an increasingly popular benefit. As an employer, you can contribute funds to a private health insurance plan or enroll your nanny in a policy, paying the bill directly to the health insurance company. Some families set aside a dedicated amount each week or month from each paycheck to put toward health insurance. There are many ways to help your nanny with the increasing costs of health care coverage but remember their medical information is private and you are not entitled to any doctor or medical information beyond the monthly bill.
- Renters Insurance. If you have a live-in nanny, they may need a renter’s insurance policy to cover their private property. They should be aware that as an employee, their possessions may not be covered by your homeowner’s policy in the event of a break-in and theft or fire.
