Do I really have to pay nanny taxes?
The short answer is yes. If you pay any nanny, babysitter, house cleaner, etc. $2,200 in one calendar year, you owe employment taxes on their wages. There are other, more specific rules that we'll get into below, but please don't miss this point.
You are hiring someone to care for the most precious people in your life. You want that person to view herself as a professional and to place a high value on her work. To maintain the integrity of the professional relationship, it's extremely important to recognize that you are your nanny's employer and that you will fulfill all of your legal and professional obligations.
Got it. Do I get anything
out of the deal?
Actually, yes! There are some great benefits for tax-paying employers that can help offset childcare costs
Dependent care account
Many employers offer this type of Flexible Spending Account (FSA) through their benefits packages. You can use this FSA to pay for up to $5,000 of child care-related expenses - such as your nanny’s pay - using pre-tax dollars. Depending on your tax rate, using an FSA can save as much as $2,300 per year.
Child or dependent care tax credit
To take this tax break, include your childcare related expenses on your federal income tax return. You receive a 20% tax credit on up to $3,000 of care-related expenses if you have one child, or $6,000 of care-related expenses if you have two or more children. This means your tax credit is up to $600 for one child and $1,200 for two or more children.
Peace of mind
Every year you pay your nanny under the table is another year you risk criminal tax fraud charges. While it's rare for these to be pursued, it is more common to be charged civil penalties and interest on unpaid taxes from prior years. A likely scenario? You and your nanny part ways and she has trouble finding a new job. She files for unemployment and lists you as her employer for the past 3 years. Your state sees no record of an unemployment tax account and automatically notifies the IRS so they can investigate. It's just not worth it!
You mentioned obligations.
What are they?
Social Security & Medicare (FICA) taxes
You owe these taxes if you pay your nanny $2,200 or more in calendar year 2020. You and your employee must each pay 6.2% for Social Security and 1.45% for Medicare, for a combined total of 7.65% each or 15.3% including both your contributions. You will withhold your nanny's share from her paycheck and will send that amount plus your portion to the IRS with your quarterly estimated tax payments.
Income tax withholding
These are your nanny's income taxes that are withheld based on the completed W4. You are not required to withhold and remit income taxes to the IRS on your nanny's behalf, though it is our strong recommendation that you do so. If you do not withhold taxes, your nanny may be stuck with a large bill at tax time, which she may not have budgeted for.
Federal unemployment tax
You pay this tax if you pay a nanny $1,000 or more in any calendar quarter, up to $7,000 a year. This tax works out to an additional 6% over your FICA contributions, but you don’t have to worry about it for the rest of the year after you pay your employee more than $7,000 in any calendar year (and we track this for you)! The FUTA tax rate can drop by 5.4% to just .6% in the form of a tax credit if you must also pay state unemployment taxes
State unemployment and/or workers compensation
Requirements vary by state and we have guides to help you determine your responsibilities. Many states require contributions to their unemployment insurance fund and others also require you to carry a workers' compensation insurance policy to cover any work-related injuries. Most states have household employer-specific requirements, so you may have to follow a slightly different process than other businesses to stay compliant.
What if I haven't paid nanny taxes but I want to get caught up?
This is the right move and we commend you for taking this big step. If you have many years of unpaid taxes, we recommend that you speak with a tax attorney or someone who specializes in helping people resolve back tax issues with the IRS.
If you're a few quarters behind or you recently hired a nanny and just realized you had tax obligations, don't sweat it! When you get set up with Nanny Files, you can input wages paid in prior periods, even if you didn't withhold taxes. We'll calculate the taxes you should have paid so you can get caught up and move forward with a fresh start.