How to pay nanny on the books
You’ve decided to hire a nanny, huh? Your nanny is a trained professional and should be compensated as such. This contrasts with your 15-year-old niece, who will watch your child for an evening for a fee of $10 per hour and as much ice cream in the refrigerator as she wants to consume. This entails taking into consideration aspects of payroll such as taxes and benefits. This affords long-term safeguards and help, not only for you but also for the person whose services you are using.
What’s the point of paying on time?
It is to everyone’s advantage: Your worker will be eligible for safety net programs such as unemployment insurance, Social Security, and Medicare, the opportunity to develop credit, and verifiable income to meet fundamental requirements such as renting an apartment or purchasing health insurance on the exchange.
You’ll be able to get a better night’s rest knowing that you’re shielded from the potential fines, penalties, wage theft lawsuits, and harm to your professional career that might arise when a former employee applies for unemployment benefits. Did you know that lawyers can be disqualified from practicing law if they are accused of committing tax fraud by failing to pay the nanny taxes? A doctor can have their license to practice medicine revoked.
This year, many families got into a jam when they had to fire an employee due to COVID, and then those employees had to petition for unemployment benefits. It is impossible to collect unemployment benefits if one has been lawfully compensated for their work. These families were forced to put a significant amount of time and energy into resolving the issue with their state and the IRS.
How much is the nanny tax?
You might believe that paying employer taxes is costly, but in reality, it is not. Increasing your budget by around ten percent will be well worth the assurance of compliance with the law that it provides.
Additionally, paying above the minimum wage enables you to qualify for the child and dependent care tax benefits. The additional tax that many families must pay allows them to break even. Use the nanny tax budget calculator included in the Nest Payroll app, which is available as a free download. You will be able to view your total cost as well as your nanny’s taxes in a variety of different circumstances. The calculator will provide you with the correct figure if your nanny inquires about the amount of her take-home pay.
What happens if you pay your nanny under the table?
Your nanny can only apply for unemployment benefits with your knowledge, which would quickly attract attention to any missed payroll taxes and potentially lead to fines, penalties, and other consequences. In addition, regardless of their job status, domestic workers have protection against wage theft and can simply file a complaint for wage theft (ranging from minimum wage or overtime issues to lack of social security and medicare). Even if an employee doesn’t have a Social Security number (SSN), labor regulations and tax rules are enforced.
How much time will be required to file your nanny’s taxes?
If you do it yourself, the Internal Revenue Service predicts it will take you more than sixty hours each year (and we think they should have counted the time spent on state taxes). If you manage your payroll using Nest Payroll, you won’t have to worry about tax preparation. You only need to enter the number of hours worked for your nanny each week; the rest of the calculations are performed automatically.
Are nanny taxes mandatory?
A nanny is almost always considered a member of the domestic staff. The following are the kind of people the IRS considers to be household employees:
- Someone who works on or around your property and provides services.
- Someone who works for you, whom you direct in their duties, and how they carry them out.
In most cases, you must pay nanny taxes if your nanny is considered a household employee. These levies consist of the Federal Insurance Contribution Act (FICA) tax for Social Security and Medicare and the Federal Unemployment Tax (FUTA).
In 2022, families will be compelled to withhold and pay social security and Medicare taxes if they pay a household employee $2,400 or more during the year. This requirement will go into effect. These taxes amount to 15.3 percent of cash compensation and are distributed equally between you, the employer, and your nanny, who receives the payment.
Employers in the household sector who pay an employee $1,000 or more in a calendar quarter are subject to the federal unemployment tax assessment (FUTA). You can also be responsible for paying unemployment taxes to the state. Cash salaries are subject to a FUTA tax of 6%. This pertains to the first $7,000 in wages earned throughout the calendar year.
There are a few unusual circumstances in which you are exempt from the need you pay nanny taxes. If any of the following apply to your nanny, you are exempt from paying nanny taxes:
- Your spouse
- Your minor child who is younger than 21 years old
- A worker under the age of 18 whose primary occupation is not that of a nanny but who does not work full-time in that capacity
- An employee who is under the age of 18 and is enrolled in school
Though each of the following conditions is met, you are exempt from having to pay nanny taxes even if your parent is caring for your child:
If your child is either younger than 18 years old OR suffers from a physical or mental illness that needs medical attention for at least four weeks in a row during one calendar quarter AND
You have been divorced and have not remarried, you are a widow or widower, or your spouse has a physical or mental condition that prevents them from caring for the child for at least four consecutive weeks during a calendar quarter.
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Benefits of legal nanny pay
It is possible that the additional time and money required to pay a nanny would feel like a hardship; nevertheless, as a home employer, doing things legally can also provide you with several benefits. Here are some of the reasons why you should pay your nanny by the law:
Prevent severe penalties
The Internal Revenue Service has made it quite evident that most household employers are required to pay payroll taxes on their employees who work in the family. In addition to the taxes already owed, you may be subject to additional financial obligations in the form of interest and tax penalties if you fail to comply with these requirements.
In addition, paying your nanny in cash rather than through a bank account could result in labor law violations, leading to further financial penalties and potential legal concerns. For instance, if you neglect to pay overtime wages or do not have workman’s compensation insurance, this could result in expensive legal fights. If you pay your nanny by the law, you won’t have to worry about this problem occurring.
Benefits for your nanny
There are perks for your domestic help that come with paying your nanny legally. Your nanny will be eligible for a variety of benefits in the future, including those of unemployment, Medicare, and Social Security, as she will be working for you. Additionally, if you deduct payroll taxes from your nanny’s paychecks, they won’t have to deal with the hassles of filing their taxes as a self-employed individual, and they may be able to reduce or eliminate the size of their tax bill come April. This is because they won’t have to pay self-employment taxes.
Tax advantages of Nanny Taxes
You can reduce the income tax you owe by qualifying for certain tax credits and deductions if you run a domestic business. For instance, if you qualify for the Child and Dependent Care Tax Credit, you can be eligible for tax savings of up to $1,200 if you pay your nanny through that credit. You may deduct up to nearly $2,000 less from your taxable income if you have a Dependent Care Account (DCA) and are registered in it.
How to Lower Nanny Taxes
You can take a few different approaches to cut costs associated with child care. When you file your individual tax return, you can use a Dependent Care FSA (Flexible Spending Account) and claim the Child and Dependent Care Tax Credit. Both of these options are available to you.
1. Dependent Care FSA
The Dependent Care FSA, or Flexible Spending Account, is a type of flexible spending account that is a pre-tax benefit an employer provides. This benefit can be used to pay for qualified, out-of-pocket dependent care expenses, such as the salaries of your nanny.
What am I able to contribute?
Whether you are filing your taxes as an individual or as a married couple submitting a joint return, the maximum amount you can contribute to a Dependent Care FSA is $5,000.
How does this improve my finances?
Because monies are withheld from your paycheck and deposited into your Dependent Care FSA account before taxes are taken out, you will have a lower total tax liability due to contributing money to a Dependent Care FSA. It reduces the amount of your income subject to taxation for income and FICA, which ultimately results in a smaller overall tax bill. if you want to read about How Much is the Nanny Tax? then you must click on this link.
How much will I be able to put away?
The amount of money you can save on taxes is determined by your current tax bracket and your area’s state and local income tax rates. For instance, if you contribute the maximum allowed to your Dependent Care FSA and your overall tax rate (federal plus state) is 35%, you might save close to $2,000 in taxes by taking advantage of this tax break. Because a Dependent Care FSA can reduce your taxable income, you can save more if your tax rate is greater.
2. Tax Credit for Child and Dependent Care
You can claim this tax credit for any child care costs remaining after you have contributed the maximum allowed to your Dependent Care FSA under the Dependent Care FSA.
The maximum amount of this credit that can be applied toward your eligible expenses is $3,000 for one kid and $6,000 for two or more children. Any household earning $43,000 or more is suitable for the credit at a rate of 20%. Therefore, the potential maximum credit for the care of one person is $600 (20% of $3,000), while the possible full credit for the maintenance of two or more children is $1,200.
The Bottom Line
Paying your nanny illegally is too great of a risk for the relatively modest amount you would owe in nanny taxes when you consider the possibility of incurring fines, penalties, employee lawsuits, audits, and other associated costs. Then, use a Dependent Care FSA in conjunction with the Child and Dependent Care Tax Credit. You can reduce your nanny tax bill significantly and even eliminate it.
Not to mention the fact that by treating your nanny as an official employee, you are providing them with the benefits of having a verifiable income and a legal employment history (both of which are required for obtaining loans, credit, social security, and Medicare), receiving unemployment benefits, and being eligible for a healthcare subsidy. It is a beautiful opportunity to show appreciation to the person whose vocation is to look after and foster your children’s growth.
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What does “on-the-books” nanny pay mean?
To pay your nanny “on the books,” you must keep accurate records of her earnings and make monthly anticipated payments or withholdings for federal and state withholding, as well as social security and Medicare if she so requests. If a nanny is paid money, they must have their salary documented and taxed.
Should I pay my nanny in writing?
Over a year, if you pay your nanny more than $2,000, you must report the entire amount as income. The federal portion of employment taxes is typically written on Form W-2 (annually), while state taxes are often paid weekly.
What if my nanny refuses to be paid on paper?
If you want to avoid paying what’s listed on the books, that’s your decision, not your nanny’s. Any costs incurred due to late or improper payments, such as interest, penalties, and interest on overdue taxes or overtime compensation, are ultimately the employer’s responsibility. Even while there are immediate and long-term advantages to paying nannies on paper, such as Social Security, earned income credits, unemployment, and Medicaid, not all nannies may be aware of this. Do what’s best for you and your nanny by paying them legally if you find the best candidate in the world.
Can I pay my nanny as a 1099 independent contractor?
There’s no way around it – they work for the home and are employees, not contractors. Your tax form will be a W-2 rather than 1099.