In the end of 2016 we finally hired a nanny (making nanny taxes a part of our life). My wife needed the break after 19 months of full-time child rearing and no sleep. We were not looking for full time help, just a few hours a week so she could get some needed mental break and go to the doctor without our son. After signing up on Care.com (I have no affiliation with them) and interviewing countless (I literally stopped counting) candidates we decided on one.
Great! Done…right? Not quite. I had forgotten about nanny taxes. This included filing taxes, filling out forms, etc. While it is easy to pay her “under the table” we are law-abiding citizens who feel okay with paying taxes. I do not want to deal with the potential tax fines in the future (up to $25K!). Plus there are positives beyond fines including protecting yourself, helping the nanny get Social Security and Medicare when they are older, and helping setting up unemployment benefits, such as workman’s comp.
Laziness can be costly
So what did we do? Honestly I was already overwhelmed and burned out with moving to a new house, fixing broken things in said new house, starting this blog, and just trying to be a good dad. I asked my wife if there was an easy way and she said YES! Care.com had a service that did all of the nanny taxes and forms for us. PERFECT. I was set….until I was not.
So the last quarter of 2016 occurred and then BAM! A $250 bill from Care.com showed up. That is how much they charge to manage taxes. Considering we only paid our nanny about $1650 for the 3 months, spending $250 to do the taxes is not okay, especially for something I could do on my own. So for 2017 I am figuring out how to do this and sharing what I have learned here with you. So here we go!
First off, the nanny is a “household employee”, which means you may need to withhold or pay taxes such as Social Security, Medicare, and Federal Unemployment Taxes (FUTA). I would also recommend getting an Employer Identification Number (EIN) through the IRS. This is free to do and you can get it here electronically by filling out a Form SS-4 found here. Side note, you can use your own Social Security number but this is less secure and becomes more complicated if you have multiple employees.
With the EIN you can start filling out your tax forms.
Upon hiring, your nanny will need to fill out a Form I-9 that can be downloaded here. For the I-9 you should ask to see your nanny’s Social Security card to ensure the numbers are correct.
· If you paid your nanny less than $2,000 for the year and less than $1,000 a quarter than you can stop. No further forms are needed. You do not need to withhold or pay any taxes.
Federal unemployment tax
If you paid your nanny at least $1,000 or more in a quarter, you must also pay the federal unemployment tax (FUTA) found here. The FUTA is 6% of wages and is capped at $7,000. It is paid completely by you (the employer) and not your nanny. So no withholding their pay! There may be a state tax owed, and this should be evaluated individually for your state. Here is a list by Home pay through Care.com.
o Example: We had to pay FUTA tax on the $1,650 we paid our nanny in 2016. If you extrapolate this out to the year, our nanny would be earning $6,600 a year and thus we would have to pay a total for this tax of $396 for the year (0.06 x 6600).
Social Security and Medicare taxes
· If you paid your nanny over $2,000 a year then you will need a Form W-2 found here. You (the employer) will need to withhold Social Security or Medicare taxes on these wages. Come tax time, the nanny will need to get Copies B, C and 2. The Social Security administration will get Copy A (along with Form W-3 which can be found here).
Social Security tax rates are 6.2% and Medicare tax rates are 1.45% for you and the nanny. So a total of 7.65% should be withheld from your nanny’s pay and another 7.65% of your own bank account. The Social Security tax caps at an income of $118,500 in 2016 and $127,200 for 2017. There is no wage cap for Medicare taxes.
o Example: We only paid our nanny $1,650 in 2016 and hired her for the last quarter. We had withheld Social Security and Medicare taxes (7.65% of her pay). Since she made less than $2000 we had to write her a refund check. We still paid the FUTA tax as she earned over $1,000 for the last quarter of 2016.
o Another example. What if our nanny earned over $2,000 and was making $1,000 a month. I would need to withhold $76.50 from her monthly paycheck (0.0765 x 1000). Additionally I would need to pay $76.50 of my own money for the taxes.
When you file your yearly tax return
Of note, it is wise to pay estimated taxes quarterly. This will help avoid fines going forward. The due dates are:
Exceptions to the above rules
If the nanny is a spouse, your children who are under 21, your parents (if you pay them), or any nanny under 18 at any time during the year do not have to pay Social Security or Medicare taxes.
If the nanny is a spouse, your children under 21, or your parents (if you pay them) you do not have to pay federal unemployment tax (FUTA). However, you have to pay FUTA for nanny’s under 18 years even though they are exempt from Social Security and Medicare taxes if they are paid more than $1,000 a quarter.
Okay, so my laziness cost me $250 for a quarter (that would be $1000 for the year)! Not a great return on investment and way more than I would ever pay a financial adviser. I hope the above helps you avoid laziness too. If you can do your own taxes using Turbo Tax or other software, then you can definitely figure out this household employee payroll tax.
Do you run your own household taxes or pay someone to do this? How much money are you spending on this tax preparation?