The information below is devoted to providing answers to some basic nanny tax questions, including payroll and other legal obligations for household employers. Although nannies are the only type of household employees mentioned, the information applies to any household employee you may have.
1. What is the Nanny Tax and do I have to pay it?
Answer – As a household employer, if you pay cash wages of $1,900 (2014) or more to your employee, you must withhold Social Security and Medicare taxes. Employers are not required to withhold Federal and State income taxes unless it is agreed upon by both parties. If income taxes are not withheld throughout the year, your nanny will be responsible for paying them at the end of the year. If you pay a total of $1,000 (2014) or more per quarter to a household employee, you must pay federal unemployment tax.
2. What are the risks of paying my nanny “under the table?”
Answer – By not paying payroll taxes, an employer risks being investigated by the IRS which could result in hefty fines of $25,000-$100,000, penalties, and potential jail time. They will also be responsible for the payment of all back employment taxes, interest, penalties, and will not be eligible for tax breaks (see question 5 below). Additionally, if you are in a state that requires workers’ compensation insurance and you do not pay taxes, you cannot obtain the insurance and as a result, if your nanny becomes injured on the job you could be responsible for his/her lost wages and medical expenses. Paying taxes for your household employee allows you to take advantage of a flexible-spending plan by using their salary as a qualifying expense.
3. Can I classify my nanny as an independent contractor?
Answer – No. 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.
4. Do I have to provide Workers’ Compensation insurance?
Answer – Most states require household employers to carry a workers’ compensation policy depending on whether your employee works part-time or full-time. This type of policy will provide compensation to an employee who is injured on the job. Even if your state does not require it, GTM strongly advises you to obtain coverage for your employee. GTM Employment Benefits, LLC is a licensed insurance brokerage that specializes in setting up workers’ compensation policies for household employers. Contact us at (800) 432-7972 to explore your options and see if GTM can help you in obtaining this policy.
5. Are there tax breaks for household employers?
Answer – Yes! There are two main tax breaks that can offset your employer tax costs. If you are legally employing someone in your home (paying “on the books”), you will be able to take advantage of one of the two following tax breaks:
- Dependent Care Assistance Program (DCAP) – Most companies provide this benefit and allow employees to contribute up to $5000 of pre-tax earnings to a Dependent Care account. You would then be reimbursed these tax-free funds to cover childcare expenses.
- Child and Dependent Care Tax Credit – For those who don’t have access to a Dependent Care Account, youcan claim the Child and Dependent Care Tax Credit (Form 2441) on your personal income tax return at year-end. You can claim up to $3,000 of the non-reimbursed qualifying child care expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. The credit can be anywhere from 20% to 35% of your qualifying expenses.
If you have more questions about nanny taxes and household labor laws, please contact GTM’s Household Employment Experts at (888) 432-7972.