It is easy to make mistakes – even unintentionally – when you employ someone like a nanny or housekeeper to work in your home. Here are some typical nanny tax mistakes made by families.
1. Classifying your nanny as an independent contractor
Nannies, housekeepers, senior caregivers, and other household workers are considered employees and not independent contractors. Simply put, you are in control of when and how the job is done. You will need to follow tax, wage, and labor laws like providing a W-2, remitting employment taxes, paying minimum wage and overtime, and more.
Giving a nanny a 1099 at tax time and calling them an independent contractor is considered tax evasion.
To do this the right way, obtain your federal employer identification number (EIN) as well as register as an employer and file a new hire report with your state.
Your nanny tax obligation will include:
- Your share of Social Security and Medicare taxes (7.65% of gross wages). Your employee will owe the same amount, which you will withhold from their pay and remit on their behalf.
- Federal unemployment taxes (FUTA), which is 6% on the first $7,000 of gross wages (this can be reduced to as little as 0.6% based on your contributions to state unemployment)
- State unemployment taxes, which vary by state
Unemployment taxes are paid by the family and not the employee.
Your employee will also owe income taxes. You are not required to withhold income tax from their pay but it is recommended so that they do not owe their entire tax obligation when they file their personal return.
Federal taxes (FICA, FUTA, and income) can be remitted quarterly using Form 1040-ES.
At the end of the year, you’ll provide your worker with Form W-2, submit a copy of the W-2 and Form W-3 with the Social Security Administration, and file Schedule H with your personal tax return. Schedule H records what you owe and what you already have paid in nanny taxes.
This is a costly mistake if left uncorrected for too long as fines and penalties for failure to pay the proper taxes can add up while you will still owe back taxes.
2. Paying your nanny a flat salary and not an hourly rate
Household employees are covered by the Fair Labor Standards Act (FLSA). They need to be paid for every hour worked and not given a flat salary to cover all working hours during a week.
If you are paying an employee by salary, you will want to convert that to an hourly rate, making sure it is above the prevailing minimum wage rate. Their pay stub should reflect hours worked, hourly rate, overtime rate, deductions, gross and net pay for the pay period, and more.
Another solution is to consider guaranteed hours, which may seem like a salary but is based on hourly and overtime rates.
3. Neglecting to pay your nanny minimum wage
Since they are covered by the FLSA, household employees also must be paid at least the applicable minimum wage rate. This would be the highest applicable wage of the federal, state, and local rates. Since the federal minimum wage has been $7.25/hour for a number of years, many states and cities have higher rates and they would apply to household employees.
Check the minimum wage rates in your state and city.
4. Failing to pay your nanny for overtime
Going back to the FLSA once again, household employees should also receive overtime pay of at least time-and-a-half for any hours worked over 40 in a seven-day workweek.
Overtime rates typically do not apply to live-in employees but state laws may vary and could supersede federal law.
5. No workers’ compensation coverage
This is the costliest mistake a family can make when they employ a nanny or other household workers.
Workers’ compensation coverage is required for household employers in many states and fines can be as high as $5,000 for every 10 days without required coverage.
If your nanny gets hurt on the job, workers’ compensation can help cover their medical bills and lost wages if they miss work due to their injury. Without the required workers’ comp coverage, your employee could also file a lawsuit and you may wind be the one paying thousands of dollars in medical bills and lost wages.
Is workers’ comp required in your state?
6. Placing your nanny on a company payroll
Household employees cannot be paid through your business.
Tax deductions on a company payroll require all employees to be “direct contributors to the success of the business.” Including household workers is considered an illegal tax deduction.
A sole proprietor can report household payroll taxes on their company’s Form 941 (or Form 943). But that is not the same as placing a household employee on the company payroll.
Even with this exception, and to keep it simple, it may be best to keep household payroll taxes separate from business-related taxes. File Schedule H for household employment taxes with your personal tax return and Form 941 (or Form 943) for your business.
7. Losing out on tax breaks
A household employer can use a Dependent Care FSA through their job to set aside pre-tax money (up to $5,000) to help pay for childcare like the wages paid to a nanny and reduce their taxable income. This can save a family up to $2,300/year depending on their marginal tax rate. A nanny’s pay is also a qualifying expense for the Child and Dependent Care Tax Credit, which can save a family up to $1,200.
8. Choosing the wrong nanny payroll service
Not all nanny tax and payroll services are the same. Many will do the bare minimum and then leave you to figure out the rest like getting set up as an employer and dealing with tax season paperwork. And good luck trying to get someone on the phone to help. That does not make life easier for you and can cause problems down the road. A business payroll company may say they can do your nanny taxes but they will just treat you like a small business, which is the wrong way to go. There are many nuances to household employment tax, wage, and labor laws that make families with domestic help much different than a traditional employers.
Choose a nanny payroll provider that will take care of your employer setup, pay your nanny the right way, handle all of the withholdings, and provide expert client support.
How to fix your nanny tax mistakes
If you are making any of these mistakes, or just need some help figuring out how to do nanny payroll, give us a call at (800) 929-9213. We offer a free, no-obligation consultation with a household employment expert. Ask questions. Get advice. And if you think GTM Payroll Services is right for you, we can set up your account in a matter of minutes.
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