As a new mom I was nervous about hiring a nanny, but now I couldn’t be more pleased. I’ve sung your praises to everyone I know.
Originally, I tried to find a nanny on my own and it took me much, much longer and only half of them spoke English. I had to do my own background checks. Morningside Nannies made it much easier, faster and more efficient.
Quality of applicants was way above what we had hoped for. Thoroughly enjoyed working with your agency – we will highly recommend you to friends.
We made you work and you did! I was extremely picky! Thanks.
Thank you so much. I would recommend your company to absolutely everyone in need of help. You always asked questions to ensure proper performance.
The quality of candidates was very good. It was a difficult decision but Amy has proven to be a wonderful choice. We could not have found a better person. I would recommend your services to anyone looking for a nanny.
In a time crunch you provided me with two excellent applicants within hours!
Morningside was by far the best as compared to the other services we used!
I liked the fact that you screened the candidates before sending them to us, rather than sending the candidate to me before I knew anything about them, like happened with (name withheld), your competition.
Compared to other agencies Morningside presented a higher caliber of candidate.
The IRS classifies nannies and most other household employees as employees of the families for whom they work.
The difference between employees and independent contractors hinges on the amount of control one has over the worker. The IRS created a 20-point test to determine control and has ruled that household workers should be treated as employees. As the employer, you tell your nanny what hours to work, you give her direction on how to do her job, she uses your tools (diapers, strollers and bottles), you determine how much she will be paid and you hand her a paycheck at the end of the week.
An independent contractor comes with their own tools, they tell you when they will be there and they determine the fee they will charge for their services. You can petition the IRS using Form SS-8 if you disagree with the IRS classification; a ruling determining if your nanny is an independent contractor may take up to six months or more.
Anyone who expects to pay more than the annual wage threshold in a calendar year, $1800 for 2012, is required to withhold and report Social Security and Medicare taxes (FICA) – regardless of how many hours the employee works.
The employer share of the FICA tax is 7.65% of the worker’s gross pay. The employee’s share is another 7.65%; you can choose to pay the nanny’s portion yourself and not withhold it. Regardless it is the employer’s responsibility to submit FICA taxes. The nanny cannot do it on her own.
The income threshold for paying federal unemployment tax per calendar quarter is $1000 for 2012. You aren’t required to withhold federal income tax, but you may do so if you and your nanny agree. IRS publication 926, “Household Employer’s Tax Guide,” available at www.irs.gov, provides solid information on household employer taxes. For paperwork relief, many parents hire a nanny payroll and tax company like Breedlove & Associates, HomeWork Solutions or GTM Payroll Services, Inc.
Nannies are required to pay their half of Social Security and Medicare (FICA) and federal and state income taxes. Employers are responsible for submitting the employee’s portion of Social Security and Medicare (FICA).
You can expect to pay approximately 10% of your nanny’s gross annual wages in taxes.
For parents who pay their nannies legally, there is substantial tax savings that can offset the cost of paying legally. In some cases, the tax savings may exceed your share of taxes.
Dependent Care Account or Flexible Spending Account. Many companies allow employees to contribute up to $5,000 of their pretax earnings to an individual Dependent Care Account. The money in this account is then used to cover childcare expenses, free of taxes. The savings are approximately $2,300 per year.
Tax Credit. If you don’t have a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (Form 2441) on your income tax return. You can take a tax credit of 20% to 30% on qualifying childcare expenses. But expenses are limited to $3,000 for one dependent or $6,000 for two or more dependents. The savings from this tax break are $600 – $1,200 per year.
All nannies must be paid at least minimum wage for each hour worked. According to federal law, household employees are also entitled to overtime pay. Overtime must be paid at 1.5 times the regular hourly rate for all hours worked over 40 hours in a 7-day work week. For your own protection, if a household employee is paid a salary based on a work week of more than 40 hours, your employment agreement with your nanny should explicitly state the regular and overtime rates of pay.
For example, the gross salary of $600 per week for a 45-hour work week could be dealt with as the hourly wage for the first 40 hours is $12.63, and the overtime wage for the remaining 5 hours per week is $18.94 per hour; the total weekly salary is $600.
Live-in household employees in Texas do not have to be paid overtime but are entitled to regular pay for every hour worked.
The payroll and tax process is quite detailed and involves getting an employer tax identification number, obtaining the necessary forms, registering your new employee and preparing the proper quarterly and annual filings. We recommend you utilize the services of a household payroll and tax specialist. For a nominal fee, Breedlove & Associates, HomeWork Solutions and GTM Payroll Services, Inc. can handle your tax and payroll responsibilities for you.
I’d prefer to pay my nanny through my business. Would that work?
No, paying your nanny through your business is illegal. The IRS has ruled that a nanny does not directly contribute to a business; therefore, it is illegal for a business to receive any kind of “tax break” on her payroll. Instead, your nanny is considered a contributing member of your household, so you are entitled to a personal tax break on her payroll as a childcare expense.
Are there any additional tax breaks if I offer my nanny health insurance?
Yes. When a household employer contributes toward a nanny’s health insurance premiums, these dollars are not considered taxable income. Neither employer nor employee is required to pay taxes on these dollars. A family may choose to pay the healthcare premium directly to the health insurance company. Families may also choose to give these dollars directly to their employee. In this case, the family must keep a copy of a current health insurance card on file for proof of a current insurance policy.
Health insurance premiums are a non-taxable form of compensation, meaning neither you nor your nanny would have to pay any taxes on that portion of her compensation. Therefore, there is a significant financial advantage to both of you if part of your compensation to her goes toward a health insurance premium.
Here’s how the tax math works. Let’s say you pay your employee $2,000 per month in “straight” (taxable) wages. Her “take-home pay” after taxes would be roughly $1,700 per month (it may be a few dollars higher or lower depending on her personal tax situation). If she then buys a health insurance policy and pays $300 per month, her after-tax “disposable” income is $1,400 per month.
Alternatively, if you pay the same $2,000 per month, but it includes the health insurance contribution (i.e. $1,700 in taxable wages plus $300 in health insurance contributions), her after-tax disposable income is $1,475 per month.
So, in this illustration, your nanny sees a real gain of $75 per month (or $900 per year) and your employer taxes are reduced by about $25 per month (or $300 per year) – simply by having healthcare contributions managed through the payroll process. It’s a win-win situation.
The nanny would not receive a tax refund of $900 if she paid for health insurance premiums with after-tax dollars. This option does not exist. She is only $900 richer if the health insurance premiums are separated from her taxable wages and she is taxed on a smaller amount of wages. Nannies do not have the option of paying for health insurance premiums with after tax dollars and then taking a refund equal to the amount of tax on the dollars used for health insurance premiums. The law (as of 2007) states that health insurance premiums paid by an individual must be paid with after-tax dollars. Only an employer can contribute towards health insurance premiums tax-free.
If a nanny pays for health insurance on her own without assistance from her employer, she must have her entire monthly salary taxed and then pay for health insurance as an after-tax expense. She will not receive a refund or write-off on her health insurance premiums. Therefore, the only way to generate savings on health insurance premiums is by having the employer provide the dollars for this expense. Employers can contribute to health insurance premiums tax-free. This can be done by providing money for premiums over and above the salary, which is a significant financial benefit.
In our example, the employer is not increasing their cost by providing health insurance, but they are saving their nanny $900 per year by reducing her salary by the amount of the health insurance premiums. If the nanny was going to pay $300 per month for health insurance in any event, she might as well pay for it with pre-tax dollars provided by her employer rather than after-tax dollars on her own. The $900 savings is generated by taxing a lower monthly gross income ($1700 vs. $2000). The nanny increases her net pay by $75 per month in receiving $300 from her employer tax-free to use toward health insurance premiums.
This is the only way to receive a tax savings on health insurance premiums. When she is taxed on the full $2000, she pays taxes on the $300 used for health insurance premiums. Uncle Sam is not holding a tax refund – she owes the $900 in taxes as she has higher taxable wages ($2000 vs. $1700).
If you have any questions about health insurance or how to set it up so you can take advantage of these tax breaks, call Breedlove & Associates, HomeWork Solutions or GTM Payroll Services, Inc. Each company is happy to provide a complimentary phone consultation and guide you through all the financial and legal aspects of being a household employer.