When preparing your individual tax return, you may be looking for ways to reduce your tax obligation. Can your nanny’s wages or other in-home childcare expenses help? Can you deduct nanny expenses from your taxes?
Here are 8 questions (and one bonus question) to ask yourself before filing your personal tax return.
1. Are you paying your nanny legally?
Paying your nanny “off the books,” “under the table,” or however you want to phrase it, will exclude you from any tax deductions.
It makes sense.
If you’re avoiding household employment taxes, why should you be able to use household employment to reduce your taxes?
If you paid your nanny $2,400 in 2022 (or will pay them $2,600 in 2023), then your caregiver needs to be “on the books.” This means filing to become a household employer, withholding taxes from your nanny’s wages, and paying your share of household employment taxes like Social Security, Medicare, and federal and state unemployment.
There may be other obligations that vary by state.
2. How much did you pay your nanny?
If your nanny’s wages for the year fall below the nanny tax threshold ($2,400 for 2022), then you do not have tax obligations and would not qualify for the Child and Dependent Care Tax Credit. Your nanny would not owe Social Security or Medicare taxes on those wages but should still file a tax return.
3. Is your child under 13 years of age?
To claim the Child and Dependent Care Tax Credit, your child must have been 12 years old or younger when receiving care from a nanny.
The child also must also be someone you claim as a dependent on your tax return.
4. Do you have earned income from a job?
You will not be able to claim your nanny on your taxes if you did not have income during the year.
Income includes salaries, tips, taxable compensation, and any net earnings from your businesses or self-employment ventures.
Pensions, annuities, interests, dividends, workers’ compensation, unemployment compensation, scholarships, and Social Security benefits, among other sources do not apply to your income level.
Refer to IRS Publication 503 for more information.
5. Why did you hire a nanny?
If you hired a nanny to care for your child(ren) so you and your spouse could work, look for work or attend school full-time, then those expenses may qualify for tax credits and deductions.
Payments made to a babysitter who watches your kids so you can have a date night or run errands will not be eligible for a tax break.
6. Who was your nanny?
If your child’s nanny was your spouse, your child under age 21, your parent, or any employee under the age of 18 at any time in 2022, then you will not be able to claim a tax break on their wages.
In these situations, the caregiver is not considered to be your employee. You do not need to withhold taxes from their wages or pay employer taxes.
Keep in mind that you will owe federal (and possibly state) unemployment taxes if you paid $1,000 or more in any calendar quarter to an employee under the age of 18.
7. Do you have access to a Dependent Care Flexible Spending Account?
A Dependent Care FSA, sometimes called a Dependent Care Assistance Plan or DCAP, is a pre-tax benefit account offered by your employer and used to pay for qualified, out-of-pocket dependent care expenses like your nanny’s wages.
By putting money into a Dependent Care FSA, you’ll reduce your overall tax obligation as funds are withdrawn from your pay and placed into your account before taxes are deducted. It lowers your taxable income (both for income and FICA taxes) so you pay less in taxes.
How much you can save in taxes depends on your tax bracket and your state and/or local income tax rates.
You can contribute a maximum of $5,000 to a Dependent Care FSA as an individual or as a married couple filing a joint tax return. The limit is $2,500 for a married person filing separately. Even if you and your spouse have access to separate Dependent Care FSAs through your employers, your combined contribution limit is $5,000.
8. Do you qualify for the Child and Dependent Care Tax Credit?
You may be able to get a tax credit for childcare expenses through the Child and Dependent Care Tax Credit when filing your tax return.
The maximum amount of care expenses you’re allowed to claim is $3,000 for one child or $6,000 for two or more children. The percentage of your qualified expenses that you can claim ranges from 20 percent to 35 percent.
You can use both a Dependent Care FSA and the Child and Dependent Care Tax Credit but not for the same expenses.
For example, if you have one child and $5,000 in childcare expenses that are covered by a Dependent Care FSA, you would not be able to claim the Child and Dependent Care Tax Credit.
If you paid a nanny to care for your two children, then you can get a tax break on up to $11,000 of their wages: $5,000 of their wages under a Dependent Care FSA and another $6,000 through the Child and Dependent Care Tax Credit.
Bonus question: Did you give your nanny a 1099?
A nanny cannot be considered an independent contractor and given a 1099 at tax time rather than a W-2.
Form 1099 is used to report certain types of miscellaneous (Form 1099-MISC) or non-employee (Form 1099-NEC) compensation.
Non-employee compensation generally includes independent contractors, freelancers, sole proprietors, and self-employed individuals.
These forms generally report payments made “in the course of your business” and not your personal payments. Wages paid to a nanny are not considered business-related, so Form 1099 does not apply to household employment.
The IRS considers nannies to be employees of the family and not independent contractors.
Household employees include housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee. Repairmen, plumbers, contractors, and other business people who provide their services as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do but also how they do it.
In general, you are controlling how your nanny’s work is done, setting their schedule, and providing the tools and supplies to do their job. That makes them an employee and not an independent contractor.
It may be tempting to classify your nanny as an independent contractor and have them manage both employee and employer portions of FICA taxes as well as avoid paying unemployment taxes, workers’ compensation, and other responsibilities. However, misclassification is considered tax evasion and can lead to significant fines, penalties, and payment of back taxes.
GTM can help
Do you have questions about household employment, paying a nanny, or claiming tax breaks? Then we’re here to help. Get a complimentary, no-obligation consultation with a household employment expert at (800) 929-9213 or schedule time with us at your convenience. If you want to leave payroll and taxes to us, sign up for our comprehensive nanny tax and payroll service.
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