How To Handle Nanny Taxes
Understanding Nanny Taxes
When you hire a nanny, you are considered by the IRS to be a Household Employer. As a Household employer, you have both Federal and State tax liability. Your nanny also has the typical tax liability that comes with being a wage earning employee.
As an employer, you are required to withhold certain taxes from your nanny’s paycheck, and remit them to the Federal and State Taxing authorities. These tax with holdings include:
* Federal and State Income Taxes
* Half of Social Security and Medicare Tax (7.65%)
* Miscellaneous State taxes such a disability insurance, etc.
For rough budgeting purposes, plan on the employer taxes being approximately 9-10% of the gross pay
You are also required to pay employment taxes on your nanny’s gross wage. These taxes include:
*Half of Social Security and Medicare Tax
*State and Federal Unemployment Taxes
*Miscellaneous State taxes
For a more exact calculation of payroll deductions and paycheck gross/net amount, see this Payroll Calculator.
However, there are a number of tax deductions and tax credits that are available for Household Employers. These include Flexible Spending Accounts and Dependent Care Tax Credits. These can help to offset some, if not all, of the tax liability you may have as a Household Employer.
Independent Contractor status
You may have read or heard that hiring a household employee as an “Independent Contractor” can save you money. It is true that Independent Contractors pay all of their own taxes, and as such, you don’t have to pay employment taxes on Independent Contractors. Unfortunately, there have been a series of rulings by the IRS stipulating that household employees do not qualify as independent contractors. Treating them as such opens you up to significant penalties and tax liability.
Payroll Process and Tax Compliance
It is entirely possible to manage your own payroll, account for, withhold and remit Federal and State taxes, and file the appropriate tax forms each year. With some research on the IRS website and your State’s Taxation website, you will find all the information you need to know as well as all the forms that need to be completed. The taxing authorities have made some effort to simplify the process. Nonetheless, it is estimated that the annual tax accounting and filing burden for a small employer is about 50 to 60 hours. And this time estimate does not include the monthly remitting of withheld taxes. Furthermore, there are many opportunities for error in the process.
Using a Payroll Service
It is the opinion of Safe and Sound Nannies that your time is probably better spent elsewhere. Many of our families choose to meet their obligations to the IRS and their State by using a payroll service to process their nanny’s pay. The payroll service will perform all of the withholding, issue paychecks, perform direct deposit, remit payments to the IRS and the State Taxing authority, file your employment tax returns, and issue the nanny’s W2 form. It is certainly easier to go this route, but it does involve a processing fee. The prices of these services vary, but generally don’t exceed $30 to $40 per month. We have used Paychex and ADP in the past with great success, but there are many others as well.
To get more tips on hiring and retaining a nanny go to: www.safeandsoundnannies.com
Dr. Ann Wycoff is founder of Safe and Sound Nannies, a full service agency, and The Nanny Answer, an online, do-it-yourself nanny screening service.