A lot of people don’t think twice about paying their nanny, housekeeper, senior caregiver or babysitter with cash. Some families don’t think of themselves as employers. And some don’t know where to start setting up payroll for a household employee.
But here’s the truth: you are legally required to handle the household employment tax process (a.k.a. “the nanny taxes”) for a domestic worker you pay $2,100 or more to during the calendar year – and it’s not as daunting as it seems.
The experts at Care.com HomePay have compiled the list below to clear up some of the myths out there surrounding nanny taxes – and the truth behind them.
1. Nanny Taxes Will Cost Too Much Money
With Flexible Spending accounts and Childcare Tax Breaks, your out-of-pocket spending might be a lot less than you think. Use this Nanny Tax Calculator and learn the true cost of paying your caregiver legally. Most families are pleasantly surprised. And your nanny will receive benefits they ultimately would not be eligible for by being paid under the table. This includes being better qualified for a loan, receiving unemployment benefits if they are laid off and earning credits toward their eventual retirement income.
2. I Don’t Have Full-time Help so I Don’t Need to Pay Taxes
Don’t you wish this were true? Instead, the law states that you have employment tax responsibilities if you pay an employee more than $2,100 in a calendar year. Housekeeper comes once a week? You likely owe some employer taxes. Have a part-time nanny? Legally, you’re responsible for her too.
3. How My Nanny Files Her Taxes is Not My Business
Unfortunately, it is. Your nanny will have to name her employer and that will drag you into her tax forms. A lot of families think nannies can be classified as independent contractors or “freelancers” and pay their own taxes. They might even fill out a 1099 for them. But this actually costs the nanny more money – and is illegal. If this was your plan, consult with HomePay and let us help put you on the correct path.
4. I Can Pay a Household Employee on My Company Payroll
Small business owners might think that they can add the nanny, personal assistant and house cleaner to their company payroll, but that’s a mistake that can be very expensive and time-consuming. The IRS says these employees work for you, not for your company. The solution is to just keep personal and business payroll separate.
5. Your Accountant Can Handle the Household Taxes
Your accountant might be familiar with state and federal household employment laws, but many are not. Additionally, most general tax professionals are not set up to manage payroll and guide you on labor law issues. You should discuss this with your accountant during the hiring process (waiting until tax time is too late). If your accountant doesn’t have expertise in the specialized area of the tax and legal world, let them know that HomePay makes the process stress-free. We’ll even loop them in during tax filing season when your household employment forms need to be added to your income tax return.
* The tax information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional tax advisor who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.
