When you provide after-school child care, you might not see yourself as an employee for the family you work for. After all, you’re not working full time for them — you’re just helping bridge the gap for the hours between when school gets out and a parent gets home. But the truth is, you still may be considered a household employee: The IRS has a specific set of parameters that determine not only whether you’re the family’s employee, but also if nanny taxes need to be a part of the working relationship.
Here’s what you need to know about “nanny taxes” and what to expect if they’re part of your payroll every week.
What are nanny taxes?
The nanny tax is a catch-all term for the tax and payroll responsibilities families take on when they hire a nanny, senior caregiver, personal assistant or even an after-school sitter. It applies to people who earn $2,700 or more during the calendar year from a family and qualify as an employee based on IRS-established guidelines that are detailed below.
“It doesn’t take long for an after-school caregiver to reach $2,700 in wages,” says Tom Breedlove, Sr. Director of Care HomePay. “Even if you’re only earning $300 per week, you’ll be above this threshold in a little more than two months.”
If you believe you’ll earn more than $2,700 from the family you’re working for, get ahead of the game by learning about how taxes and payroll work so you won’t be caught off-guard when the family has this conversation with you.
How do I know if I’m the family’s employee?
If you report to a family’s home to take care of the kids at expected times every day (meaning you can’t just show up when you want to), you perform the duties as specified by the parents (you take the kids to their ballet lessons and soccer games and not to the movies) and you follow the parents’ directions (they want you to offer healthy snacks and not cake when the kids get home), the IRS will most likely say you’re the family’s employee.
With this classification, you’ll need to receive a W-2 from the family during tax season so you can file your personal income tax return. Some families mistakenly believe an after-school sitter meeting the qualifications above can be classified as an independent contractor, but this is the wrong course of action. Read our article on why caregivers shouldn’t get a 1099 form for more information.
Why go through all the work of dealing with taxes?
The obvious answer is — it’s the law. Yes, the initial legwork of getting set up on payroll can be a hassle, but once that’s accomplished, it’s easy. Being paid legally actually helps you both in the short and long term. Aside from not having to worry about getting caught evading taxes by the IRS, you’ll establish a traceable employment history that is required for things like an auto loan or renting an apartment. Additionally, you’ll be eligible for unemployment benefits if you’re let go due to no fault of your own, and you’ll be building credits toward your retirement income with the Social Security Administration.
“Caregivers don’t often think about these benefits until they’re needed. When they are, people who are paid legally are glad they had taxes withheld from day one,” says Breedlove.
So even if you provide after-school care and are not a full-time nanny, it’s likely that the nanny tax still applies to you. Getting on the right track for paying taxes when you start your new job helps both you and the family (or families) you work for.
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* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.