How Do You Pay Taxes in a Nanny Share

May 19, 2023 | GTM Blog, Hiring an Employee, Household Payroll & Taxes

As with any other household employment, taxes in a nanny share arrangement will be owed by the families and the caregiver. We’ll answer 5 key questions to give you everything you need to know about how to pay taxes when forming a nanny share.

Nanny shares are a popular way to enjoy budget-friendly, in-home child care.

In a nanny share, two or more families employ a nanny to care for their children in one of the family’s homes. Learn more about creating your own nanny share.

Each family typically pays two-thirds of a nanny’s normal rate. This way the families save some money compared to hiring a caregiver on their own and the nanny makes a little extra for coordinating care between multiple families.

Your children also benefit from personalized care and socializing with the other family’s children while avoiding some of the illnesses that can spread through a daycare center.

As with any other household employment situation, taxes will be owed by both the families and the nanny. How do you pay taxes in a nanny share? We’ll answer that and other important questions.

1. Who is the employer in a nanny share?

Even though the actual care may take place in one family’s home, both families are considered household employers.

You are both contributing to the nanny’s pay and have control over how the nanny performs their job. That means you have an employer/employee relationship with your caregiver.

Each family will:

obtain an employer identification number (FEIN) from the IRS
get set up as an employer with the state
pay the nanny and withhold the appropriate taxes
remit their share of Social Security and Medicare taxes as well as unemployment taxes
obtain workers’ compensation insurance if it is required for household employers in the state
provide a W-2 to the nanny and file Form W-3 with the Social Security Administration at the end of the year

The nanny will receive a paycheck from each family every pay period as well as a W-2 from each family at tax time.

Separate paychecks are important if one family needs more care than their partner in the nanny share.

If the Jones family and the Smith family each employ their nanny to work Monday-Friday from 9 am – 5 pm, it is straightforward.

But what if the Jones family only needs care until 4 pm and the nanny is still on the clock for the Smith family for an additional hour each day?

The caregiver is paid the nanny share rate for seven hours (35 hours/week) and a separate rate by the Smith family for those additional hours.

Let’s say the nanny share rate is $14/hour for each family and the normal rate is $21/hour. The Jones will pay $490/week (35 hrs x $14/hr) while the Smiths pay $595/week (35 hrs x $14/hr + 5 hrs x $21/hr).

2. Does each family still need to pay minimum wage?

Yes, each family will still need to pay at least the prevailing minimum wage – the highest of federal, state, and local rates.

Overtime pay of time and a half for hours worked over 40 in a workweek also applies.

3. How do you pay nanny taxes when sharing care with another family?

Nanny taxes are paid the same way as if it was just one family with a nanny.

Based on what they pay the caregiver, each family is responsible for:

Paying the employer share of FICA (Social Security and Medicare) taxes (7.65% of gross wages)
Withholding the employee share of FICA taxes (also 7.65% of gross wages)
Withholding employee federal income taxes, if you wish, based on the employee’s Form W-4
Paying state and federal unemployment taxes

Each family can remit taxes separately on a quarterly basis using Form 1040-ES. It is recommended to pay nanny taxes quarterly rather than all at once when you file your personal income tax return. If you owe too much in nanny taxes, you may face an underpayment penalty.

Also, withholding employee income tax is not required but recommended. That way your nanny does not have to pay their entire tax obligation when they file their personal income tax return.

Each family will also file Schedule H with their personal tax returns. This reconciles taxes owed with taxes paid.

Your caregiver will receive a W-2 from each family in the nanny share.

4. What if the nanny files for unemployment?

If a caregiver in a nanny share loses their job through no fault of their own – families no longer need care, a family moves away, etc. – then they can file for unemployment through the state’s labor agency. The nanny would name each family as an employer. Since each family has been contributing to unemployment taxes, the nanny can receive benefits on their full pay.

If only one family in a nanny share is set up as an employer and the caregiver files for unemployment and reports both families as employers, then there will be issues. The family not contributing to unemployment will be caught avoiding their tax responsibility and the nanny may not receive their full benefits.

5. Do childcare tax breaks apply to nanny shares?

Absolutely. Since each family is a separate employer, they can claim their portion of the nanny’s wages as a qualifying expense for a Dependent Care FSA and/or the Child and Dependent Care Tax Credit.

A Dependent Care FSA is offered through your employer and allows you to set aside up to $5,000 tax-free for childcare expenses like the wages paid to a nanny. This lowers your taxable income and can save you thousands of dollars depending on your tax bracket.

If you don’t have a Dependent Care FSA, you can apply your nanny’s wages toward the Child and Dependent Care Tax Credit. You may claim the credit on qualifying employment-related expenses of up to $3,000 for more children, or $6,000 for two or more children. While the maximum credit is 35 percent of your employment-related expenses, most families will see a 20 percent credit ($600 for one child; $1,200 for two or more children).

Through these tax breaks, you can significantly reduce your nanny tax obligation and may actually save money rather than paying your nanny “off the books.”

GTM can help

Have other questions about nanny shares? We can help. GTM works with many families setting up nanny shares. Get a complimentary, no-obligation consultation with a household employment expert. Just call (800) 929-9213 or schedule time with us at your convenience. We’ll answer your questions about nanny shares and anything else related to household employment, paying a nanny, and nanny taxes.