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August 20, 2012

Nanny Tax Myth Busters

Blog-nanny-taxesA lot of people don't think twice about paying their nanny, housekeeper, dog walker or babysitter with cash. Some families don't think of themselves as employers. And some don't know where to start setting up a household payroll.

But here's the truth: you are legally required to handle the household employment tax process (a.k.a. "the nanny taxes") for anyone you pay more than $1900 a year – and it's not as daunting as it seems.

Care.com HomePay℠, managed by Breedlove, offers expert advice about household payroll and tax services. Our experts 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. I urge you to use the Nanny Tax Calculator and learn the true cost of meeting legal expectations.  Most families are pleasantly surprised. Your nanny might even take a small pay cut to start getting paid "on the books," but the benefits will help her qualify for a loan as well as ensure that she receives critical financial protections, such as retirement income and unemployment benefits.

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 $1900 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 a household tax expert.

4. I Can Pay a Household Employee on My Company Payroll
 

Small business owners might think that they can add the nanny, dog walker 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 an expert on state and federal Nanny Taxes, but most are not.  Additionally, most general tax professionals are not set up to manage payroll and guide you on labor law issues.  We encourage you to 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, look to our experts to make the process stress-free and risk-free.

I hope this helps straighten out any confusion you've had around paying taxes for any of your household helpers. If you have specific questions, visit Care.com HomePay℠. We also have a whole tax and finance advice section on our site >>

So tell me, what has been your biggest question or stress about paying taxes for your nanny?


* 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.

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Comments

Sara Healy

I believe our caregiver qualifies as an independent contractor because even though we pay her more than $1800 a year, she provides care for our daughter in her home more than 50% of the time while also caring for her daughter. She chooses when to be at my home, where to be at her home and what to do/where to go during the day. I understand that the IRS ultimately determines who is an independent contractor and who isn't, but I can't seem to find anyone who can verify whether or not the IRS would consider my caregiver an independent contractor.

Stacey

I agree with the post above about trying to find out what the IRS would consider an independent contractor.
A point of concern with our nannies is always health care costs and coverage. As an employer, if you add this cost, we would not be able to afford this type of care for our children. We argue a nanny in this case is an independent contractors and we do not have to provide this coverage. Just our thoughts though...

Mike S

We have used breedlove for 2 years and have been very satisfied with them. They manage all the federal and state taxes and meke it really easy. The only problems are:
Super slow web servers on the breedlove site, pages always load really slow.
Getting payroll entered by every other Friday, the same day the employee just finished, sometimes is a crunch to get the hours/miles reported to update the payroll information. Wish I had the weekend to do it before it is finalized.
THere are reporting requirements in WA state to DSHS for childcare providers. WHile this is not a tax thing, it is an administrative thing. Breedlove takes care of state tax/workers comp/unemployment stuff, wish they would do the DSHS reporting too.

Overall it is a very professinal company and well worth the $$. We used to do ith through our accountant, too complicated to do it ourselves. Like to keep things in the legit-o-sphere.

Lisa

Clearly more articles on all this needs to appear. NANNIES ARE NOT INDEPENDENT CONTRACTORS, anyone who thinks otherwise could find themselves in trouble with the IRS sooner or later. Also if your nanny loses her job and chooses to file for unemployment and taxes weren't paid, you can be in trouble big time, yes so could she but the penalties may be far less of a concern to the caregiver than not having any income at all.

JHSB

Yes, but this needs clarification - these rules only apply to those coming to work in the employer's home. They do NOT apply to caregivers working in their own home (the home of the caregiver).

JHSB

The same is true for minimum wage laws, I might add. This is where Care.com is misleading for the benefit of caregivers, but not its paying customers, the employers. Minimum wage laws also do not apply to those working within their own home as caregivers. I have been disappointed to see that care.com does not offer this information as well. Perhaps it should hire another law/accounting firm that knows all the rules.

Jason

The comment in the article about a nanny might be willing to take a small pay cut to be paid "on the books" is off the mark in my experience.

Most nannies will take less money to be paid off the books, they want more money to be paid on the books, to offset the loss of income. They want a net amount each week, if putting them on the books reduces that, and it does, then they want more money.

I have found that $12/hr works well in cash, but put the same girl on payroll and she now wants $14/hr.

Just the way it is...

Rebecca Webb

Of course our nanny is our W2 employee. We sure don't want to be unethical or get in trouble with the IRS. We pay $15 an hour to compensate the nanny for paying taxes.

Annie

Not all housekeepers/house cleaners are "household employees". Big Conceptual Error in the report there.

If your house cleaner has their own COMPANY - even as an individual person - and they use their OWN supplies when they visit your home, they are NOT your employees, they are professionals being hired for a specific service that requires their decision-making capability on how to do the work. This article is lacking that key bit of info regarding this tax reality.

You folks using "undocumented" help to watch your most cherished possessions (your children!)... gosh, I don't know what you're trying to do there. Sounds like pretty crappy treatment of other human beings to me, actually, with respect to how you KNOW how our society operates and how you're playing an under-the-radar game with their lives. If proper child care is "too expensive" to hire legal, documented folks and for you to make a proper commitment to your helpers' futures via the nanny taxes, then maybe you should take care of your children yourself?

I don't "like" paying "nanny taxes" because it's expensive. I've helped one of our helpers be able to apply for a refinanced mortgage; she couldn't have had that w/o the years of paperwork and W2's. Though I have doubts that social security will even exist 30 years from now for any of us, at least my employees - my helpers - are able to claim working credit from the time they've worked for me over the years. This does help their retirement, in theory, for 30 years from now. Paying someone under the table does not.

Ellen

Depending on how much a nanny makes, they will get almost all of the withholding back at the end of the year when they file their tax return. So, make sure they understand that AND that the withholding is correct. Most people pay some taxes, BUT it's always better to have the smallest refund possible at the end of the year vs. a larger refund. That is money in your nanny's pocket all year vs. give the government an interest free loan.

TM

If you want to do it yourself, and have the time to get set up, NannyPay software works very well. It is a lot of work (don't forget local tax payments and the Schedule H) but once you are set up it's not that hard.

Nannies are expensive. Health insurance, unemployment taxes, paid vacation, bonuses, etc. in addition to salary all add up. It's interesting that people who otherwise consider themselves to be honest and kind feel it is perfectly acceptable to pay a nanny off the books. If your argument is that you can not afford to pay a legal nanny on the books than you can not afford a nanny. Simple as that.

Randy

Does anyone know about tax breaks for in home healthcare when you are paying and reporting tax on the help?

MEW

I don't get the comment on healthcare. Just because your nanny is your employee doesn't mean you have to cover healthcare or benefits, unless you have like 50 household employees!
RE hiring someone illegal - I've never had a problem finding legal nannies, whether in NYC, or the midwest.
And the title is very misleading. You can absolutely pay your nanny in cash. You just have to pay taxes on what you pay.
And I also diagree about it's not that much. We cover both the employee and employer portion (previous poster is absolutely right that nannies are unlikely to be ok with a 6% pay cut, unless they make little enough to get the earned income tax credit), so we pay an extra 13% or so, plus unemployment taxes - so about 15% more than if we didn't.
However, it's worth it to me to do the right thing.

MEW

Oh, and I've never used a service. I pay the taxes myself. It's not that hard if you just overwithhold and roll it into your tax return at year end. Quarterly unemployment returns are easier in some states than others.
I think a service is nice if you have the money, but it's prety expensive, and I'd rather divvy that money up between nanny and myself.

Amy

For Stacey, you do not have to provide health care coverage if you have less than a certain number of employees (not sure the number, but it's at least 50). So people hiring nannies are not required to provide health care coverage. It can be a cause of concern for your nanny. Luckily mine is a veteran with VA benefits. Hopefully the health care exchanges and support to be set up by the health care law will enable nannies in such situations to be able to afford health care. I'm sure a lot of them don't have insurance now.

Seth M

I called the IRS when we first started using a nanny and all they said was to fill out a
1099-misc for her and remind her that we would be reporting our pay to them so they wouldn't "forget" and be reminded with a letter from the government. And when I do our taxes each year and input the childcare amount above 1800 it never prompts me to do anything and always raises our refund amount. This was for someone coming to our house and I'm pretty sure it asks that when I go through it.

Mrs. B

I read the article and it gave me pause for thought. I think that the comments below were even more informative. I started discovering some of the same legal ramifications for housekeepers, believe it or not. There are definite guidelines for who is and who is not an independent contractor, e.g...in order for a housekeeper to qualify as an IC, she has to supply all of her own supplies.

Having domestic workers can often seem like it is NOT worth the hassle.

JMIll

Just a quick note on nannies as "independent contractors". The IRS states that household employees are individuals that work in or around your home; employees where YOU, the employer, can control how the work is performed. Nannies that work in their own home are not considered your employee, but self-employed.

http://www.irs.gov/businesses/small/article/0,,id=97877,00.html

Hypnobirthing Bristol

It is truly a great and helpful piece of information.
I am satisfied that you simply shared this useful information with us.
Please stay us informed like this. Thanks for sharing.

Angela

I have a question, if I have a household employee(one person who comes to my home once a week and uses my supplies to clean my home) and I pay this individual $25.00 per week, equaling $1300.00 a year, therefore I do not withhold taxes for them. They do this at multiple homes and they file their taxes, how will this affect me? Any information in this area would be greatly appreciated. I have googled this many times and never get to the information I am requesting. Thank you in advance.

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