A 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.