Do You Need to Pay Taxes for a Summer Nanny?

summer nanny taxesSchool will be out soon, and if you’re going to be hiring a nanny to care for the kids during the summer, you might think that since it’s only a temporary job, you don’t need to worry about payroll taxes or even insurance. But those requirements may apply even if you’re only hiring for the season.

Our friends at GTM Payroll Services have put together this list of what you need to know about paying taxes on a summer nanny:

Your Summer Nanny is an Employee

The IRS has consistently ruled that a nanny is an employee and not an independent contractor.

This distinction is important. With an employee, the worker and employer each pay Social Security and Medicare taxes. An independent contractor pays both their share and the employer portion of these taxes.

Why is a nanny considered an employee?

She is a worker who:

  • works under the direction and control of her employer
  • has her schedule set by her employer
  • uses the employer’s tools

Essentially, you are telling your nanny how to care for your children and when to show up to your to home to work. When she is working, she is using your tools, such as plates and utensils to serve lunch.

An independent contractor is told what is needed to be done and possibly when it needs to be done by. However, they determine how the work will get done, when they will perform the work, and will use their own tools to do the work.

Your Summer Nanny Makes $2,100

If your summer nanny passes the $2,100 cash wage threshold, then Social Security and Medicare (FICA) taxes need to be paid by both you and your employee. You each have a responsibility of 7.65 percent of cash wages for FICA for a total of 15.3 percent.

Your employee’s obligation can be handled through a paycheck withholding and you can remit both your and your employee’s taxes quarterly using Form 1040-ES.

A summer nanny can very easily reach this threshold. Let’s say she makes $10/hour for 25 hours of work per week for 10 weeks. That’s $2,500 in cash wages triggering the FICA withholding requirement.

There are some exceptions. Do not count wages you pay to your spouse, child under the age of 21, parent or any employee who was under the age of 18 at any time during the year.

You and your summer nanny may also agree to withhold income taxes from their pay. It’s not required that you withhold but it may be preferred so that your nanny won’t owe all of her tax obligation come tax time. You can remit income taxes quarterly.

Your Summer Nanny Makes $1,000 in a Calendar Quarter

Federal unemployment taxes are owed if your summer nanny makes $1,000 in any calendar quarter. We’ve already shown how easily this threshold can be reached. This tax is an employer-only tax (do not withhold from your employee’s pay) and is six percent on the first $7,000 in cash wages. You may also owe state unemployment taxes.

Again, there are some exceptions. Do not count wages you pay to your spouse, child under the age of 21 or parent.

You will need to pay unemployment taxes for employees under the age of 18 if they make $1,000 in a calendar quarter.

You May Need Workers’ Compensation

Workers’ compensation is usually required for household employers in New York. If your summer nanny works 40 hours in a week, even for just one week, you need workers’ compensation coverage for the entire time she works for you.

Follow Minimum Wage & Overtime Rules

Since your summer nanny is an employee, she is protected under the Fair Labor Standards Act. This means she must be paid at least New York’s state minimum wage, which is currently $10.40 per hour. Overtime also applies. Hours worked over 40 in a week need to be paid at no less than time and a half. There are some exceptions for live-in employees.

File Year-End Tax Forms

At the end of the year, you will need to provide your nanny Form W-2 (Wage and Tax Statement)while filing Copy A of this form and Form W-3 (Transmittal of Wage and Tax Statements) with the Social Security Administration. You’ll also file Schedule H (Household Employment Taxes) with your personal tax return.

Please contact us at (518) 348-0400 for more information about hiring a summer nanny. For more info about paying nanny taxes, call GTM at (800) 929-9213 for a free, no-obligation consultation with a household employment expert.

Payroll and Tax FAQs from Nannies

payroll and tax faqs from nanniesAs a nanny or other domestic worker, you may have questions about your employment status and tax obligations. Even if it’s just a temporary placement, it’s important to understanding your (and your employer’s) responsibilities at the beginning of employment.

Here are some payroll and tax FAQs from household employees.

Am I an employee or an independent contractor?

In almost all situations, nannies and other household workers are employees and not independent contractors. If you take instruction from the employer, have your schedule set by the employer and use your employer’s supplies, tools, and equipment, then you are an employee. If you work under your own conditions, sets your own schedule and use your own supplies, then you are an independent contractor. Tax agencies like the IRS treat nannies the same way as people who work in an office, retail store, or restaurant.

Do taxes need to be taken out of my paychecks?

Yes, if you earn more than $2,100 (2018) from one family during the year. In that case, your employer must withhold Social Security at 6.2% and Medicare at 1.45% of your gross pay. Your marital status and how many allowances you choose to claim on your W-4 form will also impact how much federal and state income tax is withheld from your paycheck.

Will I need to pay any taxes?

Even if you earn less than $2,100 (2018) from any family, you will still have to report any wages earned during the year on your annual income tax return. Be sure to keep an accurate record of your earnings to help you pay both federal and state income taxes for the calendar year when you file your tax returns.

Our friends at GTM Payroll Services have a nanny tax calculator to help you figure out how much in taxes will be withheld from your paycheck.

What if my employer doesn’t want to pay taxes?

Your employer is required by law to withhold taxes if they are paying you more than $2,100 (2018) in a year. We realize that many families want to avoid paying nanny taxes and would prefer to pay you “off the books.” But the truth is that being paid legally isn’t just in their best interest – it’s in yours as well. Here are some reasons why your employer should follow the law:

  • Your employer can take advantage of their employer’s flexible-spending plan (commonly called an FSA) and deduct your salary as a qualifying expense.
  • The IRS may investigate, fine or penalize families that don’t report your wages; they must withhold taxes for you and disclose the amount on their personal income tax return.
  • In order to add funds to your Social Security account, give you the ability to obtain credit, and protect you if you become unemployed, you must be paid legally.
  • You and your employer will have a happier employment relationship. The risk of an IRS audit for your employer is greatly reduced , as is the risk of hefty fines for not following the law. And you will have a legal, recorded employment history and be eligible for Social Security, Medicare, and unemployment assistance.

Read more about legal pay for household workers, and contact us at (518) 348-0400 for more assistance.

How Nannies Benefit from Being Paid Legally

nannies benefit from being paid legallyFamilies benefit from legally paying their nannies or other domestic workers by staying compliant with the law and being able to take advantage of tax breaks. But a nanny benefits as well from being paid legally even though they may see a little less in their paychecks.

If you’re hiring or looking to transition a current employee to “on the books” and she doesn’t want taxes taken out of her pay, explain these nanny benefits and protections that they’ll enjoy.

Nanny Benefits of Legal Pay

1. Verifiable income

If your employee applies for a car loan, student loan, mortgage or even a credit card, they’ll need to show that they can pay monthly installments. Being paid legally provides a verifiable income to show the lending institution. If their pay is not documented, they have no way to show that they have a job that brings in a steady income.

2. Legal employment history

Having a work history is also important when applying for a loan, credit, or their next job. Being paid “on the books” creates a legal employment history that banks and lending institutions as well as future employers can verify.

3. Unemployment benefits

As an employer paying your workers legally, you are required to pay unemployment taxes. This is an employer-only tax yet it’s your employee who benefits. If your nanny loses her job, through no fault of her own, unemployment benefits will partially replace their lost wages for up to six weeks while they look for a new job. Amicable splits are common in household employment and this is a benefit your nanny will want if they find themselves without a job.

4. Social Security and Medicare benefits

Social Security and Medicare taxes will be taken out of your nanny’s pay. This money is set aside to help pay for their living and medical expenses when they retire. As an employer, you’ll also pay into their Social Security and Medicare. If your nanny is paid “under the table,” they won’t receive these benefits. As a result, they may need to continue working past retirement age.

5. Health care subsidy

Under the Affordable Care Act (ACA), a health insurance marketplace has been created to help uninsured people find coverage. If your nanny wants to purchase a policy through the marketplace, they could qualify for a subsidy and cut the costs of their insurance. For example, a nanny who makes $40,000 and lives on her own in New York City would save 38 percent on their health insurance premiums. Of course, this is only available to them if they are paid legally.

6. Employment benefits

As an employer, you may want to provide benefits to your workers to help retain your best employees. A 401k retirement plan and health insurance plans that may be cheaper and provide better coverage than the ACA marketplace are a couple of perks that would set you apart from other employers. But your nanny will be need to paid legally in order to take advantage of these benefits.

The benefits and protections of being paid legally far outweigh the small amount of money that will be taken out of their pay each week.

How Recent Tax Reform Affects Child and Family Tax Credits

tax reform affects child and family tax creditsThe recently enacted Tax Cuts and Jobs Act (TCJA) made significant changes to income tax rates, exemptions, deductions, credits, and more. What does this mean for your family’s finances, specifically child-related tax credits?

Expansion of Child Tax Credit

TCJA doubles the child tax credit to $2,000 for each child under age 17. It also expands the number of families who can take advantage of this credit. Currently, the credit is available to joint filers with an adjusted gross income (AGI) of up to $110,000 and $75,000 for all other filers. Going forward, the credit will be available to joint filers with an AGI of up to $400,000 and $200,000 for all other filers.

New Qualifying Dependent Credit

For qualifying dependents other than children under 17, such as an elderly parent or college-aged children, the tax reform act includes a $500 credit, subject to the same income limits as the child tax credit.

No Change to Child and Dependent Care Credit and Flexible Spending Accounts

While tax reform made a number of changes, the Child and Dependent Care Credit remained intact. This credit allows parents to deduct qualified child care expenses such as day care or a nanny’s pay. The credit can be worth as much as $1,050 for one child under 13 or $2,100 for two children.

Flexible Spending Accounts (FSA) have also been left in place. Parents can set aside up to $5,000 in pre-tax dollars through paycheck deductions and then use that money for qualified expenses.

Expansion of 529 Plans

529 plans, tax-advantaged accounts for parents to save for their children’s college education, may now be used to pay for K-12 education tuition and related educational materials and tutoring. Up to $10,000 per year from 529 accounts can be used tax-free.

 

 

For tax advice specific to your situation, consult your accountant or other tax professional.

Nanny Tax Planning for 2018

nanny tax planning for 2018Hard to believe 2018 is less than two weeks away! Now is a good time to ensure that everything is in order so there are no surprises when it comes time to pay your nanny taxes next year. Don’t put off or ignore your 2017 year-end tax planning; look at your finances and think about any changes you will be making for the rest of this year and into early 2018. Some things to consider include:

  • Adding/decreasing your employee’s hours during the holiday season
  • Awarding a year-end bonus
  • Adjusting salary for 2018
  • Making note of the new minimum wage in New York
  • Vacation pay for the holiday season

The domestic employee coverage threshold amount will rise to $2,100 for 2018; this means that you are required to pay taxes if you pay a nanny at least $2,100 for the year. Make sure you keep accurate records of any changes you make, along with any changes to any federal or state tax and wage laws.

Contact us at (518) 348-0400 if you have any questions or need more information.

2018 Nanny Tax Threshold Increases

2018 nanny tax thresholdThe Social Security Administration recently released its employment coverage thresholds for 2018.

Social Security and Medicare taxes (commonly referred to as “nanny taxes”) must be paid by the family and the employee for any household workers, such as nannies or housekeepers, who earn $2,100 or more in cash wages in 2018. This is a $100 increase to the threshold which was last changed in 2016 to $2,000.

Wages paid to a spouse, child under age 21, parent, or any employee under the age of 18 do not fall under the nanny tax threshold.

Employers must pay 7.65% (Social Security at 6.2% and Medicare at 1.45%) in nanny taxes. The same amount can be withheld from the employee’s pay, or the employer can pay their worker’s share and not withhold. The total Social Security and Medicare taxes must be 15.3% of cash wages.

For more information on the nanny tax threshold, visit Employment Coverage Thresholds on the Social Security Administration website.

Learn more about paying your employee legally, and contact us at (518) 348-0400 for more information.

Nanny Tax Compliance Infographic

Mistakes or misinterpretations of nanny tax compliance laws can mean IRS audits, thousands of dollars in fines and penalties or an employee lawsuit. Our friends at GTM Payroll Services have created this handy infographic that highlights what you need to do to maintain nanny tax compliance. Click the image below to view a larger version.

nanny tax compliance

Steps to Comply with Nanny Tax Requirements

steps to comply with nanny tax requirementsIf you are hiring a nanny or other household employee, it’s important to understand your obligations as a household employer. You must file all applicable nanny tax forms, Social Security, Medicare, federal and state unemployment insurances, and income taxes. These obligations apply to all full-time and part-time employees that you expect to pay over $2,100 (2018) in the course of a calendar year.

Some families pay their child care providers in cash or “off the books.” Although this gives the employee more income and saves families from the extra paperwork, it is illegal and can make you liable for unpaid childcare taxes, interest, and penalties. Therefore we recommend following this list created by our affiliate GTM Payroll Services to ensure you know the steps to comply with nanny tax requirements.

14 Steps to Nanny Tax Compliance

  1. Obtain household employer tax IDs (federal and state). In order to report childcare employment taxes and issue employee tax statements, you must obtain an employer identification number (EIN) from the IRS. Your state will require you to obtain a separate number for state unemployment insurance reporting and possibly income tax withholding reporting as well.
  2. File a new hire report with your state (if necessary). Generally, the information you must provide to state agencies includes the employee’s name, address, Social Security number, as well as your name, address, and federal employer identification number (EIN).
  3. Purchase workers’ compensation insurance (if required in your state). Workers’ compensation insurance protects both you as the household employer and your employees in case of a work-related injury or illness. See what the requirements are in your state.
  4. Adhere to all applicable tax, wage, and labor laws that pertain to household employment such as a Domestic Workers’ Bill of Rights. To see which laws impact household employment in your state, see our state-by-state guide.
  5. Verify your employee’s social security or tax identification number and complete Form I-9 for employment eligibility. Household employers must obtain a completed Form I-9 for every employee hired. This is used to verify the identity and employment eligibility of your domestic workers. Keep this form on file with copies of the documentation your employee provided for employment eligibility.
  6. Calculate employee tax withholdings. Your household employees’ wages fall under the Federal Insurance Contribution Act (FICA), so a portion of the wages you pay needs to be withheld and paid as Social Security and Medicare taxes. Both you and your employee are required to pay a percentage (7.65%) of the gross wages. You may pay the entire amount yourself and list the employee’s share as additional taxable gross income. The IRS, realizing that many employers will not want a large tax liability at the end of the year, strongly recommends quarterly estimated payments.
  7. Prepare and distribute paystubs (even if paying by direct deposit). Even though pay statement distribution isn’t required under federal law, most states have opted to pass state laws that require employers to provide regular statements about their pay and withholding. Employee name, Social Security number, pay rate, pay period, and deductions are what is generally required on the statements. Find out if your state has pay statement laws and whether pay stubs can be provided to employees electronically here.
  8. File and remit quarterly state employment taxes. Generally, all states require state income taxes to be paid quarterly with your state income tax department. See a list of state tax departments here.
  9. File and remit quarterly federal taxes using Form 1040-ES. The IRS encourages household employers to deposit federal nanny taxes four times a year using the 1040 ES form.
  10. Prepare and distribute Form W-2 to your employees by January 31 (for previous year’s taxes and wages). All wages and tax withholdings must be reported on your employees’ W-2 form at the end of the year. The W-2 form must be given to your employee, the IRS, and to your state.
  11. File Copy A of Form W-2 and Form W-3 with the Social Security Administration by January 31. See instructions on these forms here.
  12. Prepare Schedule H and file with your federal income tax return (Form 1040). Schedule H is filed annually and goes with step 9 on this list.
  13. Read and respond to government notices or alerts. When the IRS or another government agency contacts you about your household employment, it’s important to respond in a timely manner to avoid any penalties or other hassles.
  14. Monitor changes to tax, wage and labor laws that could potentially affect household employment. Some good websites to monitor information that could impact household employment can be found here. If your state is considering new laws like a Domestic Workers’ Bill of Rights or a paid sick leave law, make sure you stay informed on what the law entails and if it affects household employers.

The easiest way to ensure you are compliant with nanny tax laws is to have a professional service like GTM handle your household payroll. They will remove the hassles, worries, and risks of nanny tax compliance and give you peace of mind (plus more time in life for the things you enjoy).

Contact GTM for a free consultation at (800) 929-9213, or download their Complete Guide to Household Payroll for more information.

*The information contained within is designed to give the user general guidelines on the subject of household employment taxes. Tax laws can vary considerably from different taxpayers based on the circumstances and the state of residency. This information is not designed to serve as legal, accounting, or tax advice. GTM encourages you to consult with a competent tax advisor concerning specific matters before making any decisions. GTM does not accept any responsibility for positions taken by taxpayers for any interpretations on the information found within.

Paying a Nanny Through Company Payroll

paying a nanny through company payrollQ: I own a business. Can I pay my nanny through my company payroll?

A: While it may be tempting to do so, it is illegal, in most cases, to pay a household employee on a business payroll.

The legal basis for keeping business and household payroll separate, according to the IRS, is that businesses can receive a tax break on their payroll costs because the employees directly contribute to the company’s success. A household employee does not directly impact the success of a business the way a business employee does, and therefore a nanny or other domestic worker’s wages must be paid on the employer’s personal federal income tax return, either annually or quarterly.

The only instances when reporting household employment taxes on the employer’s business federal income tax return are acceptable are:

  • if the employer is a sole proprietor, or
  • if the home is on a farm operated for profit.

In either of these cases, the employer may opt to include federal household employment taxes with their federal employment tax deposits or other payments for the business or farm employees.

Another way this issue arises is when it comes to health insurance. A company’s group health insurance policy cannot include household employees, as they are not employed by the company. Insurance companies will likely refuse to pay any benefits if you submit a claim for a household employee through a business insurance policy. Read about the ways you can help your household employee get health insurance coverage here.

Contact us for more information at (518) 348-0400.

Paying Nanny Taxes: Not Just for Cabinet Nominees

paying nanny taxes not just for cabinet nomineesFollowing the presidential election in November, new potential Cabinet members have been going through the nomination process in the Senate. Two of those nominees have come under fire for issues relating to the hiring and paying of household workers. President Trump’s choice for White House budget director, Mick Mulvaney, failed to pay more than $15,000 in household payroll taxes, jeopardizing his nomination to the post. Mulvaney needs to pay state taxes, penalties, and interest, despite saying he settled his federal tax bill. President Trump’s choice to lead the Labor Department, Andrew Puzder, has admitted that he employed an undocumented immigrant to work in his home, saying he has paid all back taxes to the IRS and the state of California. He claims that once he found out she was not legally permitted to work in the U.S., he terminated the housekeeper.

Of course this is not the first time we’ve heard of this issue; the subject of nanny taxes has come up with nominees for Cabinet posts for Bill ClintonGeorge W. Bush, and Barack Obama. But while these cases are very high-profile and make news headlines, paying nanny taxes is not just for Cabinet nominees. It’s the law for anyone who pays a household worker more than $2,000 (2017) in a year, and just because a family isn’t answering questions in front of a Senate panel, there are many ways to get caught paying an employee illegally.

One of the most common ways employers who aren’t paying legally are exposed occurs when their employee gets injured on the job. In this case study, not having workers’ compensation coverage can be extremely costly:

A household employer living in New York State hired a nanny to care for his children, but ignored the state’s workers’ compensation coverage requirement. One day the nanny slipped and hurt her back. The doctor asked how she got hurt, and she relates that it happened while she was working. This leads to a workers’ compensation claim. New York is one of the many states that require household employers to carry workers’ compensation insurance for their employees. Of course, the workers’ comp board in New York had no record of her even being employed because the employer hadn’t paid her legally. So not only was the household employer penalized $37,000 by the New York Workers’ Compensation Board for not having a policy, the New York State Department of Tax and Finance and the IRS got involved, requiring the employer to open their wallet again to cover the back taxes and penalties incurred by not paying their employee legally.

Another common way the government discovers an employer is not paying their employee legally is when that employee leaves the job and files for unemployment insurance. But that can lead to the state’s labor department having no record of the employee holding a job. Why not? Because the employer hasn’t been paying unemployment insurance. This immediately raises a red flag and the employer can expect a call from the state, with significant fines likely to follow.

A third way employers paying “off the books” are exposed is when their employee decides they want to start being paid legally. For example, the two parties originally agreed on not withholding taxes, but later the employee started to notice what she was missing; she can’t apply for a loan or obtain credit because she has no legal work history; she isn’t saving any money for retirement and isn’t eligible for Medicare or Social Security benefits; and she can’t apply for unemployment insurance if she leaves the job. She wants to start getting these benefits, and if the employer does not agree to start paying legally, she can sue the employer, resulting in paying back taxes and penalties once the illegal working relationship comes to light, along with court and attorney costs.

A final common way for an employer to be exposed for not paying nanny taxes is in the case of an audit by the IRS or state tax agency. The audit could be a result of one of the above examples, or if there is another reason for an audit to be conducted, the non-payment of nanny taxes would be discovered, leading to far more fines and legal troubles than the original reason for the audit would have generated.

The bottom line is that it’s illegal to avoid paying nanny taxes, whether you’re a nominee for a Cabinet position, or you’re a regular family from Anytown, U.S.A. that hires a household employee.

Read more information on the benefits for both employers and employees on paying nanny taxes, or contact us at (518) 348-0400.