Your kids are back in school and you’ve hired an after-school nanny for a few hours each day. She meets the kids off the bus, prepares snacks, starts them on homework, and maybe even helps with getting dinner ready. You pay your after-school nanny in cash on Fridays and everyone is happy.
However, you should be aware that nanny tax and payroll requirements may apply even if the work is part-time.
Here’s what you need to know:
Social Security and Medicare taxes need to be paid by both you and your after-school nanny if they make $2,100 or more in a calendar year.
Let’s say your after-school nanny works three hours a day at $15/hour. It will only take them about 10 weeks to hit that threshold and require withholding.
You could also withhold income taxes from their pay. It’s not required but your after-school nanny may prefer it so they won’t owe all their tax obligation at tax time.
If your after-school nanny is:
- your spouse
- your child under the age of 21
- your parent
- any employee who was under the age of 18 at any time during the year
then you don’t have to worry about nanny taxes.
If your after-school nanny makes $1,000 in any calendar quarter, then you are required to pay federal unemployment taxes. You pay this tax. It is not withheld from your employee’s pay. You may also owe state unemployment taxes.
Again, there are some exceptions. Do not count wages you pay to your spouse, child under the age of 21 or parent. However, you will need to pay unemployment taxes for employees under the age of 18 if they make $1,000 in a calendar quarter.
Minimum wage & overtime rules
Your after-school nanny is considered an employee and is protected by the Fair Labor Standards Act’s minimum wage and overtime rules. They must be paid at least the federal minimum wage or your state or local minimum wage, whichever is highest. Hours worked over 40 in a week need to be paid at no less than time and a half.
Workers’ compensation may be required for household employers in your state even if the work is part-time.
Coverage could apply even if your after-school nanny reaches the required hours just once. For example, you live in a state where only full-time workers are covered by worker’s compensation. However, your after-school nanny works eight hours a day for five days over a school vacation week. Then you may need a policy that covers the entire time your employee works for you.
Your after-school nanny is an employee
You may try to classify your after-school nanny as an independent contractor, shift the entire tax obligation to your worker, and avoid nanny taxes altogether.
However, the IRS regularly considers an in-home caregiver, like an after-school nanny, to be an employee and not an independent contractor. Your employee should get a W-2 at the end of the year.
How to pay your after-school nanny
Here are the steps to pay your employee the right way.
1. Obtain your household employer tax ID from the Internal Revenue Service and register as an employer with your state. You may need to file a new hire report with your state as well.
2. Obtain workers’ compensation insurance (if required by state law). In most states, you can’t add this to your homeowner’s or renter’s insurance policy. You will likely need to purchase a separate policy.
3. Verify your employee’s social security or tax identification number. Complete Form I-9 for employment eligibility and keep it on file along with copies of the documents provided for eligibility verification.
4. Calculate your nanny’s tax withholdings. You must withhold 7.65 percent of their wages for Social Security and Medicare (FICA) taxes. You’ll also contribute this amount as an employer for a total of 15.3 percent being remitted for FICA taxes. As mentioned, withholding income tax from your employee’s pay is optional. If you and your nanny decide to withhold, you would do so based on their W-4 form.
5. Remember that your employee must be paid at least the highest minimum wage of federal, state, and local rates. They are also entitled to time-and-half overtime pay.
6. Prepare and distribute paystubs even if you’re paying by direct deposit or other electronic methods like PayPal or Venmo.
7. File and remit federal taxes quarterly using Form 1040-ES as well as state taxes.
8. Prepare and distribute Form W-2 to your employees by January 31 for the previous year’s wages and taxes.
9. File Copy A of Form W-2 and Form W-3 with the Social Security Administration by January 31.
10. Prepare Schedule H and file with your federal income tax form.
Get the resources you need
Download The Complete Guide to Household Payroll, which will walk you step-by-step through paying your after-school nanny the right way and avoiding the risks, fines, and penalties of non-compliance with tax, wage, and labor laws.
If you’re hiring for a long-term placement, call GTM at (800) 929-9213 for a free, no-obligation consultation with a household employment expert.