It’s hard to know all the ins and outs of hiring a caregiver, but families often overlook one important thing: taxes. Unless you’re a tax expert, you probably have a few questions about how to do things correctly. To help you out, here are the answers to some common nanny tax questions and concerns:
What Are Household Employment Taxes?
If you pay your caregiver $2,000 or more in a calendar year, the IRS says you have tax and payroll responsibilities as a household employer. Household employment taxes are a combination of taxes you withhold from your caregiver and the taxes you pay as the employer. Typically, you’ll withhold Social Security and Medicare (collectively known as FICA) and federal and state income taxes from your employee each pay period. You’ll also pay a matching portion of FICA, as well as federal and state unemployment insurance taxes.
Note: Not all states operate this way. Some don’t have income taxes, while others require additional taxes to be either withheld from your employee, paid by the employer, or both. Visit the HomePay website to see the specific requirements for your state.
Is Your Caregiver an Employee?
In short, yes. According to the IRS, a person is an employee if you’re telling them what they will do and how they will do it, as opposed to an independent contractor that you tell only what results you’re looking for. Families that misclassify their household employee as an independent contractor (by providing a Form 1099 for filing taxes) can be charged with tax evasion.
What Will Families Need in Order to Pay Household Employment Taxes?
Here are four things to collect:
- Tax ID numbers: You need both federal and state tax identification numbers in order to report household employment taxes. You can get your federal employer identification number (FEIN) from the IRS and use this number to obtain your state identification number from the appropriate tax agency in your state.
- Payroll info: You need to accurately calculate your caregiver’s gross pay, calculate the taxes withheld and track the corresponding employer taxes each pay period. We have a great paycheck calculator if you need help crunching the numbers.
- Forms:
- You must provide your caregiver with a Form W-2 by the end of January each year.
- You need to file any required year-end forms with the state, as well as Form W-3 and Form W-2 Copy A with the Social Security Administration.
- You need to prepare a Schedule H and file it with your federal income tax return.
- Quarterly filings
- You should file state tax returns, typically on a quarterly basis.
- You should send 1040 estimated payments to the IRS four times per year.
The good news? Once you’ve joined Care.com HomePay, we handle all of these forms and quarterly returns for you.
What Will My Caregiver Need to Provide?
Here are three things that caregivers need to provide at the time of hire:
- A Social Security number or an ITIN;
- A completed Form I-9 with proper identification; and,
- A completed federal W-4 form and corresponding state income tax withholding form (if you live in a state with income taxes).
What Are the Benefits of Paying Your Caregiver Legally?
Both families and their caregivers actually benefit from proper tax reporting. Employers may be eligible for tax breaks to offset the cost of taxes and have less to worry about if they’re audited by the IRS or the state. Caregivers also gain this peace of mind; plus, it’s easier to qualify for short- and long-term benefits like:
- Social Security income and Medicare coverage upon retirement
- Unemployment benefits if they lose their job due to no fault of their own
- A verifiable employment history necessary for obtaining auto and home mortgage loans
- Reduced health care costs via subsidies provided through the Affordable Care Act
What Can Happen if You Pay Your Caregiver “Under the Table”?
Here’s a simple example of what can happen: your caregiver works for you for several years without having taxes withheld or you paying taxes on their wages. When a change in your loved one’s needs occurs, you decide to part ways, since their services are no longer needed. Your caregiver files for unemployment benefits and is required to list their past employers, which includes your family. The unemployment office reviews the case and finds that your family didn’t file any tax returns or pay into the state unemployment insurance fund. Your ex-caregiver is refused benefits and you’re now facing an audit from the state.
What’s the punishment? Here’s the list of possibilities: tax evasion charges; back taxes with penalties and interest; liability for the employee and employer portions of FICA; and, in some cases, loss of professional license.
As of April 2006, the IRS has started to crack down on employers who pay under the table or misclassify their employees as independent contractors. Now more than ever, it’s important to be cautious.
How Much Work Will This Involve?
The IRS estimates the average family can expect to spend 50-55 hours per year correctly managing the household employment payroll and tax process. This includes all the tax requirements listed above, as well as managing your caregiver’s payroll and responding to any notices sent by the IRS and tax agencies in your state.