I've recently received inquiries from clients wanting to hire nannies. Hiring a nanny is not only very stressful because this person is caring for your child, but there are quite a few taxes and compliance issues you need to think about.
1. I'm most often asked, Can I give my nanny a 1099 and call them an independent contractor? Unfortunately, NO.
From the IRS Publication 926: "You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full-time or part-time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job."
Keep in mind that your child's caregiver is not the only type of household employee. Other household employee examples include housekeepers and in-home caregivers.
2. The follow up is, Do I need to pay taxes for my Nanny? Typically, YES.
If you pay your household employee over $1,000 per quarter or $2,000 per year (2017), then you'll need to pay some sort of federal and state employment taxes. Once above this income threshold, a nanny is considered a household employee which now renders you an official Employer (Yay!). This requires you to withhold FICA from their wages as well as pay your employer portion of their FICA tax. FICA includes 6.2% of wages for Social Security and 1.45% for Medicare that is withheld from your nanny’s wages and then as an employer, you must match the same percentages of their wages for a total of 15.3% (Yikes!).
You are encouraged to also withhold federal, state and local income tax from their wages, but that can be decided between you and your nanny. If you do not withhold income tax, your nanny should be aware they need to make quarterly estimated tax payments.
You are also required to pay federal and state unemployment tax. If you timely pay your state unemployment taxes, the federal unemployment rate is 0.06% of the first $7,000 of their wages (or $42). State unemployment tax rates vary by state but Pennsylvania's default new employer tax rate is roughly 4% on the first $9,500 of wages. The state unemployment rate varies based on your "experience rating" and that is determined after you have gained some history as an employer. PA also has a small employee withholding of .07% on all your nanny's wages.
If you and your nanny agree that you should withhold state and local taxes, you'll be required to withhold and remit state taxes and local taxes at the applicable rates.
Before you say FORGET THIS and decide to pay your nanny in cash, I suggest you read this CNBC article about the subject of avoiding taxes and the headaches involved. Also, consider the benefit that your nanny can later get unemployment benefits and you'll be adding to their social security. You can also claim your dependent care tax credit.
You'll want to keep in mind that if your nanny collects unemployment your unemployment rates will increase.
3. Required Filings
The FICA, federal income tax, and federal unemployment are reported and paid on a Schedule H as part of your personal tax return. If you are paying a nanny $20,000 in a year you should probably be paying quarterly estimated tax payments so you are not paying all of this tax in April when you file your tax return. If you don't file quarterly estimates, you could be penalized. We can help you determine what to pay and how based on your situation.
The Pennsylvania withholding rate is 3.07% and Pennsylvania bases your filing requirements on the amount of tax withheld. For starters, you'll probably be a quarterly filer for PA withholding tax. Local withholding is generally due each quarter.
Pennsylvania unemployment tax returns are due each quarter.
Finally, at the end of the year, you need to file Forms W-3 and W-2 to report their wages to the Social Security Administration, state and local taxing authorities. This is due by January 31 following the end of the year.
4. Getting Things Setup
Measure twice, cut once is a great saying. In a like manner, getting setup on the right track will save you headaches down the road. Here is a basic checklist to get you started on the right track.
5. Wrapping Up
This may seem a bit overwhelming and you may be ready to send your child to a daycare to avoid all of this hassle, which is understandable. However, this process can be fairly seamless by allowing our office to manage these administrative burdens for you. We'll take care of the registrations. Each pay, we calculate the check amount for your nanny based on the hours worked (factoring in payroll tax withholdings). We then create and provide a paystub electronically and your nanny receives her paycheck via direct deposit.
We also automatically handle paying all required taxes so that you really don’t have to think about them. Finally, we prepare the Schedule H, Form W-2, federal 941, state withholding, local withholding, state unemployment and any other payroll tax forms for you. Plus, if you need to call us, you'll talk to a real person immediately. Our clients find this service economical and tremendously helpful. Please contact or call us today to find out how we can help with this important task.
In addition to claiming the dependent care credit, a few other perks of having a nanny is that you can take advantage of the dependent care flexible spending account which allows you to defer up to 5,000 to a participating employer’s plan. The tax benefits of this plan could pay for a month of childcare. You can also allow your nanny help you with other household chores. When your child naps, your nanny is able to help you with various household tasks, such as laundry and cleaning.
Many of my clients have shared with me that having a nanny is one of the best decisions they've ever made. In many cases, the right nanny becomes a trusted friend and is valued like a family member.
Other items for reference:
IRS info on the Nanny Tax
Pennsylvania info on household employees
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Robert W. Morris & Company, PC
19 E Main St, PO Box 68
New Bloomfield, PA 17068