So You’ve Hired a Nanny. Now What?
Paying your nanny “under the table” could leave you with additional taxes & penalties!
There are two big problems with “nanny tax”.
One, most people who hire a babysitter don’t believe that they could be affected by “nanny tax”. It seems like it should only apply to families that have a live-in au pair or a full-time nanny. You just have a sitter cover an occasional date night and take care of the kids during the summer break. That doesn’t call for dealing with taxes, does it?
Two, those who have heard about “nanny tax” often believe that playing by the rules would be too cumbersome or too expensive. Childcare is already hard enough to find. Add in withholdings, record-keeping, and filing requirements – and suddenly compliance doesn’t seem worth the hassle. After all, what could possibly go wrong? You’ve never heard of anyone going to jail over failing to pay “nanny tax”!
And yet, this could be an expensive mistake. Here’s what you need to know to avoid it.
Nanny Tax 101
Let’s start by reviewing the facts you need to know in order to make the right decision for your family.
If you pay your nanny or babysitter over $2,100 over the course of a year, you may be required to withhold taxes. As with many tax rules, there are exceptions and finer points of application (more on that later). For now, it’s important to understand that the $2,100 cutoff applies to each person who babysits your children. So, if you have two sitters and each one of them receives $2,000 from you during the year, you don’t have to worry about “nanny tax”.
Keep in mind that the requirement to withhold “nanny tax” only applies if you are a direct employer for the babysitter. For example, suppose you hire a recent college grad who is taking a year off to study for her LSATs. If you pay her more than $2,100 during the year, you may have to withhold taxes. However, if you hire an agency, interview several nannies they provide, and choose one of them, then the agency is employing that nanny and taking care of the taxes. You are not her employer.
Nanny Tax FAQs
Q1: Isn’t my nanny/babysitter an independent contractor?
No, she isn’t. A nanny isn’t an independent contractor. She follows your specific instructions about the hours she is working, what she is doing, and how it must get done. It doesn’t matter whether the “position” is temporary or permanent, and it doesn’t matter how many hours a week she is working for you. Because you control when and how things get done, a nanny is an employee.
Q2: What if my babysitter is under 18 or is a full-time student?
This is a good example of an exception. If you hire someone who’s under 18 years old or is a student, then childcare isn’t their principal occupation. In this case, there are no Social Security or Medicare taxes.
Q3: What if my babysitter doesn’t want me to file the paperwork and withhold taxes?
The conversation about setting up tax withholdings is a tough one. Many babysitters don’t report the money they make as taxable income, especially if it’s paid in cash. So, if you were to withhold taxes and file forms, then they would have to report the income and potentially pay taxes on their side as well. Yes, this means you may have to pay a little more per hour to ensure that her take-home pay isn’t negatively impacted. At the end of the day, if you make the decision to stay in compliance on your end, your nanny must adapt – or work somewhere else.
What does “nanny tax” mean for you?
If you’ve done the math and determined that your childcare needs will result in paying over $2,100 to any one provider, you have a choice to make. You can hire the nanny directly, which makes you her employer. Or, you could hire a third party that employs caregivers and takes care of filings and taxes.
Let’s go through compliance steps for a direct employer.
There are three categories of taxes that may apply in your situation.
An employer must withhold 6.2% Social Security and 1.45% Medicare taxes from the paycheck.
An employer must pay a matching 7.65% tax (602% for Social Security plus 1.45% for Medicare) on the compensation as “nanny tax”.
An employer must pay unemployment taxes on Federal (and potentially State) level. Figuring out the specifics can be tricky, but the net tax rate after the FUTA credit is about 0.6% for most employers. This tax is calculated on the first $7,000 of wages paid to each nanny.
An employer may withhold Federal and State income taxes if the nanny requests it. In this case, the employer must remit those Federal and State income taxes to the appropriate agencies on behalf of the nanny at least quarterly.
So, if you have a recent college grad watch your kids 20 hours a week at $15/hour for 10 weeks in the summer, she would make $3,000. Here’s an estimate of what your withholdings and obligations would look like.
You would withhold $186 for Social Security and $43.50 for Medicare from her paychecks ($229.50 total). That means she would take home $2,770.50 – not the full $3,000.
You would pay a matching $229.50 as “nanny tax”.
You would pay $18 for unemployment taxes.
You would have a choice to withhold Federal and State income taxes, or to have the nanny handle that directly.
So, overall, if would cost you an additional $247.50 to hire your summer caregiver in a way that’s compliant with tax requirements. It would cost her $229.50 in Social Security and Medicare withholdings, plus she would have to report what she makes as taxable income (unless she is exempt from filing).
You would also have to file for an EIN (Employer Identification Number), issue the nanny a W-2 by January 31 of the following year, and complete Schedule H as part of your normal personal tax return. Many families prefer to remit “nanny taxes” quarterly so as not to have them all come due at once. Of course, if you are withholding Federal and State income taxes on behalf of your nanny, you must remit those quarterly.
You hired a nanny. What about that nanny tax?
In our experience, much of the “nanny tax” burden isn’t about having to pay the tax itself. After all, the financial cost of compliance comes out to 8.25% of childcare costs for most families.
What’s harder to manage is all the paperwork that goes along with it. From filing for an EIN, making sure that you get updated W-4’s for each babysitter, issuing W-2’s, tracking payments, remitting taxes, and storing all this information for the required 4 years, compliance can become a chore.
The bottom line is, if you work with a babysitter or a nanny who receives more than $2,100 per year for taking care of your kids, you may be required to withhold certain taxes and pay employer taxes (Social Security, Medicare, FUTA, and potentially State unemployment tax). If you want to pay your caregivers legally and also to avoid the headaches associated with tax forms and record-keeping, consider hiring a third party who will take care of that for you. Their fee is a small price to pay for peace of mind come tax time.