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Nanny Taxes


I thought a nanny was an independent contractor and could take care of her own taxes. Is this true?

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.


I’m planning to hire an afterschool sitter or nanny for my child. Do employers of part-time nannies have tax obligations?

Anyone who expects to pay more than the annual wage threshold in a calendar year, $2400 for 2022, 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. 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.


What taxes does the nanny pay?

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).


What taxes do I have to pay?

You can expect to pay approximately 10% of your nanny’s gross annual wages in taxes.

  • Half of Social Security and Medicare (FICA)
  • Federal Unemployment Insurance (FUTA)
  • State Unemployment Insurance
  • Disability and Workers’ Compensation where required.


Are there any tax breaks for me as an employer?

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.


Do I need to be concerned about overtime pay if my nanny is receiving a salary?

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.


What do I need to do as a household employer?

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. This applies to household employers with only one employee.


The nanny I’m about to hire would like to have health Insurance as part of her compensation package. How does that work?

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.


Why can’t my nanny just pay for her own health insurance policy and then deduct the premium expense on her itemized tax return?

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).

GTM our preferred payroll and tax provider, provides complimentary consultations to all of our clients. Contact Patrick DiFiore by email, p.difiore@gtm.com or by phone, 800-929-9213 x7248, and mention Morningside Nannies for your complimentary consultation. Their website is also full of helpful information, including a tax calculator. GTM offers clients of Morningside Nannies FREE account set up – a $95 value – should you choose to engage them for payroll and tax services. Mention Morningside Nannies when you call or use code 95AGENCY online.


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