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Budgeting for a nanny goes beyond the wages you’ll pay your caregiver.
No one needs to tell parents that childcare can be expensive. Whether you choose a daycare center or an in-home caregiver, you’ll want to get a complete picture of your financial obligation.
When hiring and employing a nanny, you should factor all costs beyond their wages so there are no surprises that could bust your budget.
Here are 11 factors to consider when budgeting for a nanny.
1. Hourly rate of pay
This will be your biggest expense in budgeting for a nanny. There are several influences on how much you’ll pay your nanny, such as:
- cost of living in your area
- a nanny’s skills, experience, training, and education
- live-in or live-out (live-in nannies could be paid less because they are receiving room and board)
- full-time or part-time
- number of children in your nanny’s care
Remember, it’s the law to pay your nanny an hourly rate and not a salary.
The International Nanny Association’s Salary and Benefits Survey is a good resource for getting a sense of the going rates in your area for a nanny with your desired skill set.
Always negotiate wages with your nanny based on a gross hourly rate. This is their pay before taxes and other deductions. Nannies can use a nanny tax calculator to determine their net – or take-home – pay. A nanny’s net pay can vary depending on how much income tax they want to be withheld from their wages.
2. Overtime
The federal Fair Labor Standards Act requires nannies and other household employees to be paid overtime for hours worked over 40 in a week. Your overtime rate needs to be at least time-and-a-half. So, if you employ a nanny for 50 hours a week at $20/hour, their weekly gross pay will be $1,100 (40 hours x $20 + 10 OT hours x $30). State laws may vary for live-in employees and would supersede federal law if it is more beneficial to your employee.
3. Nanny taxes
You’ll owe employment taxes if you pay your caregiver $2,700 or more in 2024 (or $2,800 in 2025). You’ll pay 7.65 percent of your nanny’s wages into their accounts for Social Security (6.2 percent) and Medicare (1.45 percent). These are FICA taxes; you’ll withhold the same amount from your nanny’s pay. You can also choose to pay your caregiver’s share of FICA taxes.
If you pay your nanny $1,000 or more during any calendar quarter, you’ll also pay federal unemployment taxes, which is six percent on the first $7,000 in wages. You may also owe state unemployment, which can be around two to five percent on a certain amount of your employee’s gross wages.
A comprehensive nanny tax and payroll service can manage your tax and wage responsibilities for $70/month. You could also try to do it yourself or pay your accountant to handle your payroll and tax obligations.
4. Workers’ compensation insurance
Your state may have a workers’ compensation requirement for household employers. Coverage may cost a few hundred to several hundred dollars a year. Only a couple of states – California and New Jersey – allow you to add workers’ comp for a household employee to your homeowner’s policy. Get a workers’ compensation quote from GTM.
5. Benefits
Offering health benefits or a retirement plan is a great way to attract the best candidates for your position and increase your employee’s job satisfaction. Benefits can be affordable and may offer some tax savings.
6. Agency or online job site fees
Searching for a caregiver should also be part of your budgeting for a nanny. You may be able to find a nanny through a referral from a friend, neighbor, or colleague. Social media outlets like Facebook groups are another free way to post your job. However, many families use an online job site or a nanny placement agency to find their nanny.
Free searches on online job sites are usually limited, so you pay their monthly fee. Remember to cancel your membership when you no longer need it, as some sites will continue to automatically bill you even if you’re not using it.
An online job site will cost less than a nanny agency but they aren’t as efficient as you think. Families going through an agency spend less time on the hiring process, find higher quality nannies, and keep them longer than those using an online job site. The nanny agency’s placement fee may well be worth the investment. An agency will also help you with job descriptions, interviewing, and work agreements and provide other resources.
7. Back-up care
Here’s another area where an agency can be helpful. There will be times when your nanny calls in sick or takes paid time off. An agency may be able to send a temporary caregiver to your home for the day or even for a week if your nanny is on vacation. A cost is involved, but it may be more convenient if you can’t take time off work or rely on family or neighbors to help. Your employer may also offer back-up care as a benefit.
8. Background checks
Your agency likely has performed background checks on all of its candidates, saving you the time and expense of performing them. If you aren’t going through an agency, you can expect to pay about a couple hundred dollars to get comprehensive background checks on your nanny. These can include checks of the sex offender registry, criminal convictions, driving record, Social Security number, credit history, professional licensing as well as drug testing.
9. Year-end bonus and raises
According to our recent survey of nannies, most receive a year-end bonus of at least $750. You may also want to consider potential raises after performance reviews. If you find a great nanny, you’ll want to do everything you can to keep them on board. Providing feedback on their performance, setting goals, and rewarding excellent work helps keep your nanny happy and engaged in their work.
10. Entertainment and activities
Will your nanny take your kids to the zoo, museums, pool, theatre, beach, movies, lunch, or any other entertainment venues or educational opportunities? This may mean signing up for memberships or planning to buy discounted tickets. You could give your nanny cash to pay for these expenses or provide them with their own credit card. Or your nanny can pay with their own money and provide an expense report for reimbursement. However you manage these activities, they should factor into your budgeting for a nanny.
11. Transportation costs
If your nanny will be taking your children out of the house, you’ll need to consider modes of transportation. Will they use public transit like buses or the subway? Then they’ll need passes. Or will your nanny drive? If your nanny is driving, will they use their car, or will you provide one? You may be better off having your nanny drive a family car. That way, you control the vehicle’s safety and maintenance. You’ll just need to add your nanny to your auto insurance policy. You may see a slight increase in your auto insurance premium if your nanny is young or has a poor driving record.
If your nanny will drive their car, you could reimburse them for mileage. The IRS standard mileage reimbursement rate is 67 cents/mile.
Tax savings
So far, we’ve detailed your expenses, from wages to benefits to transportation costs, when budgeting for a nanny. Now, let’s get into how much you can save on your taxes. There are two main ways to realize tax savings on your childcare costs.
Flexible Spending Account
Your employer may offer a dependent care flexible spending account (FSA). You can contribute up to $5,000 a year to a Dependent Care FSA if you’re a single parent or a married couple filing a joint tax return or up to $2,500 a year if you’re married and filing separately. A Dependent Care FSA lowers your taxable income as funds are taken out of your paycheck before taxes are calculated. You can then submit your nanny’s wages as a childcare expense to be reimbursed from your FSA.
Child and Dependent Care Tax Credit
With the Child and Dependent Care Tax Credit, you can count up to $3,000 in expenses for one child and up to $6,000 for two or more children. The amount of the credit is based on your adjusted gross income and ranges. Most families that hire a nanny get a tax break of 20 percent of their expenses (up to $600 for one child and $1,200 for two or more children).
Nanny tax calculator
Use a nanny tax calculator when budgeting for a nanny to figure out your total employer responsibility (wages and employer taxes) and how much you can save through an FSA and the Child and Dependent Care Tax Credit.
GTM can help
If you have any questions or need assistance budgeting for a nanny, call GTM Payroll Services at (800) 929-9213 for a complimentary, no-obligation consultation. Or schedule time with us at your convenience. Our team of household employment experts will be happy to help!
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