When hiring a nanny you in essence become a small business employer. It is important for you to know what things need to be considered in this relationship regarding taxes and payroll. This doesn’t have to be difficult and in fact there is information available to help you navigate the system. Here are a few considerations to keep in mind.
- Employee or independent contractor – Depending on the circumstances your nanny may be either an independent contractor or an employee. The difference between the two positions will affect how you pay the tax. As an employer there are certain forms that you and your nanny will need to fill out. If she is an independent contractor you may not be required to fill out these forms. If she works full time for you in your home, most likely she is considered your employee.
- Your responsibilities – If your nanny is your employee you are required by law to withhold and pay the employee’s taxes. You are responsible for the employer’s half of Social Security and Medicare and federal and state unemployment insurance. You are required to withhold the employee’s half of Social Security and Medicare. You may have an option to withhold the nanny’s portion of state and federal income taxes. Check with a tax advisor for current information for your area.
- Eligibility to work – Make sure your nanny is eligible to work for you. Follow the U.S. Citizenship and Immigration Office procedures and have the nanny fill out an I-9 form. This will verify eligibility.
- EIN – You will need to apply for a Federal Employer Identification Number or EIN. This is available online at www.irs.gov/business/small. You will also need to contact your state government for a state EIN.
- Tax deductions – Certain reimbursements can be structured in such a way that they become tax deductible. Health insurance is one such expense. Check with a tax advisor to find out which reimbursements can be eligible.
- Withholding – Your nanny must pay taxes based on what she earns. You can pay her federal taxes if you choose. She will need to fill out a W-4 form which you will need to keep for your records and use to calculate the amount due. Withholding payments are usually made quarterly to the IRS and you will need to include a completed 1040ES form.
- Tracking withholding – Set up a system to track the withholding payments. It will be important for you to know how much you set aside during the year for these payments.
- End of year reporting – At the end of the year in addition to your regular tax form you will need to file a Schedule H and report whatever amounts you withheld for your nanny and the amount you paid for her wages. You will also need to give your nanny a W-2 form which shows her gross wages along with deductions and withholdings. She must receive this from you by January 31st and by February 28th you will need to give the IRS a W-3 form to report her wage information.
- Paying under the table – Non payment of nanny taxes on your part is not an option. There are severe penalties for those who try to circumvent the tax system. Not only are there hefty fines to pay, you may find yourself facing tax evasion charges or even imprisonment for failure to comply.
- Tax professionals – There are services available for you to use to take care of all your nanny’s tax related concerns. Some people do not have the time or the inclination to handle the paperwork and monitoring necessary to keep everything straight where taxes are concerned. Hiring a service to do this for you is one way of making sure the job is done and with minimal effort on your part.
It may seem like a daunting task but it doesn’t have to be. With planning and good record keeping staying on track should be manageable. In the event that it just seems too much to handle, call the professionals and let them take care of it for you.
