5 Nanny Tax Facts…or Myths?

Having a household employee can be a complicated situation; employers need to be aware of federal, state, and local tax and wage laws in order to stay compliant. There are many issues about which household employers may have questions – the list below answers some of the most common ones. Read on to learn about 5 nanny tax facts…or myths.

1. It is illegal to pay nannies through your company’s payroll.

FACT! It is not proper for an employer to pay a household employee through their business payroll. A household employee is an employee of the home, not the business, and therefore would not qualify for the tax deductions that would otherwise be allowed with a traditional business employee. In most cases, federal household employment taxes must be paid on the employer’s personal federal income tax return, either annually or quarterly. The only exception to reporting federal household employment taxes on the employer’s personal federal income tax return is if they are a sole proprietor or if their home is on a farm operated for profit. In either of these cases, the employer may opt to include federal household employment taxes with their federal employment tax deposits or other payments for the business or farm employees. For more information, refer to IRS Publication 926.

2. Nannies are entitled to overtime pay.

FACT and MYTH (in some cases)! According to the U.S. Department of Labor, the federal Fair Labor Standards Act (FLSA) requires employers to pay overtime pay of one and a half times the regular pay rate. Overtime pay must be paid for work over 40 hours per week. However, some live-in nannies are exempt from overtime depending on the state in which they are employed. Employees hired to provide baby-sitting services on a casual basis, or to provide companionship services for those who cannot care for themselves because of age or infirmity, are exempt from the FLSA’s minimum wage and overtime requirements, whether or not they reside in the household where they are employed. State and local laws for overtime vary and may supersede the federal FLSA law. Consult a certified professional at GTM for more information, or contact your state department of labor for your state’s specific laws. A household employer should specify in the work agreement when approved overtime can occur and what the specific rate of pay will be to avoid conflict when the issue arises.

3. Nannies are independent contractors.

MYTH! There are specific differences between an employee and an independent contractor. An employee is a person who takes instruction from the employer, has a schedule set by the employer and uses tools and equipment provided by the employer. An independent contractor is a person who works under their own conditions, sets their own schedule and uses their own supplies. Most nannies who work in an employer’s home whether it be on a temporary or full-time basis are considered household employees, not independent contractors because they work under the family’s control and have their schedule and pay set by the family. In the past, the IRS has made determinations that caregivers are considered employees and it is illegal for a family to treat them as independent contractors. Read more about this issue.

4. Employers do not need to track a nanny’s hours.

MYTH! According to the FLSA, employers are required to keep records on wages, hours and other items as specified by Department of Labor regulations. These records include hours worked each day and total hours worked each week. Not keeping proper time records makes it difficult to prove the hours an hourly employee has actually worked and when they may be eligible for overtime pay in the event of a wage and hour audit by the Department of Labor. Learn more about record keeping for your nanny or other employee.

5. Only full time nannies need to be paid legally.

MYTH! Any household employee who earns $1,900 (2015) or more in a calendar year must be paid legally and the employer must withhold Social Security and Medicare taxes regardless of whether they work on a part-time or full-time basis. Employers must pay federal unemployment tax for any employee who earns wages of $1,000 (2015) or more in a calendar year. Since the wage threshold for these requirements is low, many times even the most part-time employee needs to be paid legally.

For more information about these and all issues regarding household employment, contact the experts at GTM at (888) 432-7972.