We hired a nanny. Now what about the taxes?

We hired a nanny. Now what?

As the kids settle in to the first couple weeks of summer break, many parents have gone the route of hiring a nanny to supervise the kids while parents work over the summer. Although this is a common practice, what often isn’t fully understood are the tax implications that can arise when someone chooses this option for summer daycare. The details can seem daunting, but a few key points can help to clarify a potentially complicated requirement.

Most notably, the “Nanny Tax” is only applicable when the nanny is deemed to be an employee of the parent or guardian. For example, if the nanny is an employee of a company providing caregiving services, none of the details below come in to play.

Viewing the parent or guardian as an “employer” can help to clarify many of the requirements regarding taxes and record-keeping. Below are some key points applicable to families in that situation.

While in this post we’ve specifically addressed the situation of hiring a nanny, it is important to note that the “Nanny Tax” is potentially applicable to other household service providers as well – such as babysitters, gardeners, or maids – if they meet the same criteria detailed above.

A summer Nanny can be a life saver for many families. The tax requirements can create some additional work, but knowing the requirements at the outset can go a long way toward alleviating headaches once the summer fun has passed and it’s once again time to file the tax returns.

1. Employers are required to withhold social security and Medicare taxes if paying a nanny at least $2,100 during a calendar year. The taxes required to be withheld are the 6.2% social security tax and the 1.45% Medicare tax. Additionally, the employer must also pay a matching 7.65% portion of social security and Medicare taxes on the nanny’s compensation when it is time to pay the Nanny Taxes. Employers are only required to withhold Federal and State income taxes if the nanny makes that request.

2. Withholdings should begin with the first paycheck. If expecting to exceed the $2,100 limit, employers should begin withholdings from the outset to avoid the need to catch-up on withholdings from a later check. If an employer initially makes withholdings and does not reach the $2,100 limit, the employer can always repay the nanny the taxes withheld from earlier checks.

3. If the nanny is under 18 and child care isn’t the nanny’s principal occupation, the employer is not required to withhold. This is an important point, as it means that students who are part-time babysitters are generally exempt from withholding.

4. The $2,100 compensation limit is per nanny. For example, if a parent or guardian pays two nannies $2,000 each this summer, no withholding would be required for either nanny.

5. If required to withhold, the employer will need to issue the nanny a W-2 by January 31st of the following year. Employers should ask each nanny to fill out a W-4 form right away. This provides the employer with all the information necessary in the event there is a need to issue the nanny a W-2.

6. An employer needs to complete Schedule H when filing their individual income tax return for the year. Schedule H is used to calculate taxes due on the nanny’s withholding and the equal employer’s share of social security and Medicare taxes due. If an employer paid a nanny at least $1,000 in any calendar quarter, the employer may also owe a small amount for Federal unemployment taxes.

7. The employer may need to consider the need to make estimated tax payments. The Federal nanny taxes due are paid with the employer’s individual income tax return. However, there is a need to consider the additional Nanny Taxes due when considering if estimated tax payments are required. Some taxpayers find it easier to remit the Nanny Taxes as quarterly estimated tax payments. Any state tax withheld would be remitted to the state separately. This is typically separate from state income tax returns, and rules can vary from state to state.

8. Good record-keeping is important. Records should be maintained for at least 4 years from the due date of the employer’s individual tax return, as protection in the event of a future audit. Records should include: Form W-4 completed by the nanny, dates of employment, dates and amounts of wages paid and taxes withheld, and proof of any tax payments made related to the nanny’s employment.