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March 01, 2010

Do You Pay the Nanny Tax?

BLOG-Nanny-Tax Do you know about the Nanny Tax? Did you know it applies to more than just nannies?

If you paid a babysitter, nanny, or housekeeper more than $1,700 last year, you could be responsible for footing the tax bill.

It turns out most families don’t know about the Nanny Tax—and often the ones who do don’t pay it. Does yours?

According to the best estimates, anywhere from 80-95 percent of people who have regular home care providers like babysitters, nannies, and housekeepers don’t pay the taxes they owe. The number of people who paid the nanny tax has dropped by more than 25% over the past 15 years, even though the number of nannies has risen since then. A quick read through of the comments on news stories show most families either don’t know about the tax, don’t pay it, or both.

Yes, it’s the middle of tax season (fun times, right?). When you gather your W-2’s, receipts, interest statements, and donation reports, you should also pull together documentation of what you’ve paid your babysitter, nanny, or care provider because you might owe “The Nanny Tax.”

The Nanny Tax is actually made up of three different federal employment taxes that employers have to pay: Social Security tax, Medicare tax, and federal unemployment tax. For most families, it adds up to a little over 16% of what you paid your babysitter or nanny for the year. 

It’s important to stay compliant with IRS regulation and federal tax laws. There are many stories of people who didn’t pay the Nanny Tax one year and got into trouble later on: Zoë Baird, a Clinton nominee for attorney general, had to withdraw her name from consideration; last year, Caroline Kennedy withdrew from the U.S. Senate race; Timothy Geither ran into trouble for not paying the nanny tax during his nomination for Treasury secretary.

Even if you’re not running for public office like those above, it’s still important for “regular people” like us to stay compliant on their taxes. There are many people who have had less-public confrontations with the reality of the Nanny Tax and faced paying thousands in tax bills and fines. It’s easy to see how a seemingly small issue like the Nanny Tax (and leaving it off of your tax return) can grow into a big problem later on.


Did you pay your Nanny Tax this year? Why or why not?


Important note: if you have any financial or tax-related questions, contact your accountant or a tax professional. All content in this article is for informative purposes only and Care.com is not responsible for any actions you choose to take with your own taxes or personal finances. Thank you.

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Comments

Sarah

I want to pay the nanny tax, but I can't figure out how to do it. Could you please post some specific instructions to help us all do the right thing?

JC Herz

We're getting ready to hire a nanny - what's the most affordable nanny payroll service?

Sheila

Hi Sarah,

Definitely check out this article from the New York Times -- it's a great tutorial for how to stay compliant with IRS regulations.

http://nyti.ms/bGtCod

Cheers!

bitter

In the typical backwards style of the government, the people who really need help are punished rather than rewarded. Families arent what they used to be where dad worked, made enough to support a family and mom stayed home and handled everything domestic. Shouldnt working families who have to pay someone ELSE to raise their kids receive a break?!

Nicole

I do this myself. Using excel, I've set up a what I call a pay stub for my nanny. Using basic caculations, I record how much she worked and what the cooresponding pay is. Then again using basic calculations, I deduct federal taxes - based on IRS guidelines, and 1/2 of the social security and 1/2 of the medicare. I hold all these withdrawals, then 1/month via EFTPS.com, I electronically deposit those funds to the IRS, plus my contribution to social secuity and medicare (the other 1/2). Along with it, I file a form 941 monthly to show what was due. I also include in the pay stub a running total for YTD pay and taxes withheld. I print this out and give to my nanny each week with her check.

esther voluck

bs'd

We had to let our nanny go, because of cost...I had never deducted any taxes, what can I do now?

David

NANNY EXPERIENCE:
We are not hiring a Nanny. We did in the past and it was a nightmare with the state of VA. We have been back and forth for 3 years - they say we under-payed, we pay them, they refund it saying we are square, then six months later we get another assessment. Keep records not only of what you pay and what you base it on, but if you have any conversations with state or federal tax agencies, document exactly what dept they are from and what they told you with their name and employee id number.
HOUSEKEEPER QUESTION:
We are now looking to hire a housekeeper to replace our maid service and this area seems ripe for tax issues. We have asked only for applicants who plan to pay their own taxes (work as a 'contractor', bring their own supplies, and we will allow them to set their own hours within certain boundaries, so that they can work other jobs (we only need ~15-20 hours per week. Based on what I read, it seems we will be in a gray area with this arrangement. Any advice or experience?

FrenchNad

Wow - never heard of the nanny tax!
Is a typical childcare deduction for a nanny or au pair more than how much is owed with the nanny tax, i.e. does one make up for the other usually?
Not much experience in that area, thanks for your help!

Carole

Sarah - Would you be kind enough to share your Excel spreadsheet with those of us who are also trying to do this ourselves? ~ Carole

Khursheed

Hi - to the person w/ the XL...could you kindly share with this forum? Thanks,

--K

Chrystal

Household employers need to file a Schedule H with their personal tax filings. If you are a household employer you are not a business and do not file a 941. Household employees are domestic employees and are subject to different forms and filings, especially with the state. Check with State and IRS to get schedules.

Rachel

Regarding nanny tax services - my sister in New Jersey had a tough experience. The service did file all of the papers for her, but due to a New Jersey date entry error, they starting sending letters saying she was not compliant with the required paperwork. Rather than helping her figure out the problem, the nanny tax service just sent the papers to her and said good luck. She was very frustrated that they wouldn't take care of the problem - isn't that why you're paying them? - and it was even harder to sort out because she hadn't filed the original paperwork herself.

Question - does anyone know how to make a W-2 for the nanny? We have all the payment data, but just don't know how to make it a legal form. Thanks.

Brookville House Cleaning

As a woman who has had her share of challenges filling out her taxes and as the owner of a Brookville house cleaning service I can tell you how important this is. Some maid services will partner with CPA's and EA's and offer their information as part of their cleaning services.

The thing I've learned is that even if you call the IRS you can sometimes get contradictory answers. Thank goodness for care.com!

Susan

I am having trouble finding any discussions FOR Nannies. I have found a million websites describing what employers have to do, but nothing for Nannies and what we are expected to pay. My employer says she's going to "claim" me, but she never took anything out of my check. I am afraid I will have to pay a lot when tax season rolls around. Anyone know of any good sites or articles I can read about this??? I want outside info on what my rights are and what I am truly expected to pay before I am just told that I owe so much. Thanks

Samantha

I use NannyChex to pay my nanny and file my employer/employee taxes. They have done everything for me which has been a huge relief. I chose them because I found them to be the least expensive service, and while it certainly isn't fun having to pay a payroll service, I like knowing everything is done right, and legally.

Good luck!

thurston

does nanny tax apply if i take my kids to the nanny's
home???

Swindell

nanny is considered as a household employee. Thank you for sharing this information. I don't have any idea about the Nanny Tax. So can you please include more details about the same?

David

To tell the truth,i have never heard of nanny taxes.You have clearly described the about it..Thanks for sharing informative content.

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