Hiring a nanny to care for your children can provide peace of mind. But it also comes with important legal and financial considerations. If you want to pay your nanny legally and avoid tax penalties, you need to pay them “on the books.”
If you’re short on time, here’s the quick answer: You need to withhold taxes from your nanny’s pay, report their wages, pay payroll taxes, and comply with labor laws. Doing this correctly requires filing paperwork and issuing your nanny a W-2.
But the effort helps avoid IRS fines and ensures your nanny receives Social Security benefits.
In this comprehensive guide, we’ll walk through everything you need to know to legally pay household employees like nannies.
Determine if Your Nanny is a Household Employee
Before you can pay a nanny legally, it’s important to determine if they are considered a household employee. There are several control factors that can help you determine this:
Control factors that make a nanny an employee
One key factor in determining if your nanny is a household employee is the level of control you have over their work. If you have the ability to dictate when and how they perform their duties, provide them with tools or equipment, and set specific guidelines for their work, then they are likely considered an employee.
Additionally, if they are working exclusively for your household and not providing services to other clients, this further supports their classification as an employee.
It’s important to note that the IRS considers nannies to be household employees, regardless of whether they work full-time or part-time. Even if your nanny is only working a few hours a week, they are still considered an employee and should be treated as such for tax purposes.
IRS household employment taxes
Once you have determined that your nanny is a household employee, you will need to fulfill your tax obligations as an employer. The IRS requires employers to pay certain taxes on behalf of their employees, including Social Security and Medicare taxes, federal unemployment tax, and state unemployment tax (if applicable).
As an employer, you are responsible for withholding your nanny’s portion of Social Security and Medicare taxes from their wages, as well as paying your portion of these taxes. You may also need to pay federal and state unemployment taxes, depending on your location.
To ensure compliance with IRS regulations, it is recommended to consult with a tax professional or use a reputable payroll service that specializes in household employee payroll. These resources can assist you in calculating and remitting the appropriate taxes, as well as providing you with necessary tax forms such as a W-2 or Schedule H.
For more detailed information on how to pay a nanny legally and fulfill your tax obligations as an employer, you can visit the IRS website at www.irs.gov.
Have Your Nanny Complete New Hire Paperwork
When hiring a nanny, it is important to ensure that all necessary paperwork is completed to comply with legal requirements. This not only protects you as an employer, but it also ensures that your nanny receives the benefits and protections they are entitled to.
Here are three important forms that your nanny should complete as part of their new hire paperwork:
I-9 Employment Eligibility Verification form
The I-9 form is used to verify the identity and employment eligibility of individuals hired to work in the United States. Both you, as the employer, and your nanny must complete this form. The form requires your nanny to provide documents that establish their identity and eligibility to work, such as a passport or driver’s license and Social Security card.
It is important to carefully review the instructions and list of acceptable documents provided with the form to ensure compliance.
W-4 Withholding Allowance Certificate
The W-4 form is used to determine the amount of federal income tax that should be withheld from your nanny’s paycheck. Your nanny will need to complete this form to indicate their filing status and the number of allowances they are claiming.
The IRS provides a withholding calculator on their website to help determine the appropriate withholding amount based on your nanny’s specific circumstances.
Any state withholding forms
In addition to federal income tax withholding, some states also require employers to withhold state income taxes from employees’ paychecks. Depending on the state in which you reside, there may be specific forms that your nanny needs to complete for state tax withholding purposes.
It is important to research the requirements of your state and provide your nanny with the necessary forms.
By ensuring that your nanny completes these new hire paperwork forms, you can be confident that you are paying your nanny legally and in compliance with applicable laws. It is always a good idea to consult with a tax professional or employment law attorney to ensure that you are meeting all legal requirements and obligations as an employer.
Obtain an Employer Identification Number (EIN)
When hiring a nanny, it is important to treat them as a household employee rather than an independent contractor. This means that as their employer, you have certain legal obligations, including obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
An EIN is a unique nine-digit number that is used to identify your business entity for tax purposes.
To obtain an EIN, you can apply online through the IRS website or by mail. The process is relatively simple and free of charge. Once you have your EIN, you will need to provide it to your nanny and include it on any tax forms or documents related to their employment.
Why is an EIN important?
An EIN is important because it helps ensure that you are paying your nanny legally and complying with all tax laws. It also allows you to properly report your nanny’s wages and withhold the appropriate taxes.
Having an EIN also allows you to separate your personal finances from your nanny’s wages. This can be helpful when it comes time to file your taxes or provide documentation to the IRS.
How to apply for an EIN
Applying for an EIN is a straightforward process. You can visit the IRS website and fill out an online application. Alternatively, you can complete Form SS-4 and mail it to the IRS. The form will ask for information about your business, such as your name and address, as well as the type of entity you are (e.g., sole proprietorship, partnership, corporation).
Once your application is submitted, you will receive your EIN immediately if you apply online. If you mail in your application, it may take a few weeks to receive your EIN.
- Keep your EIN in a safe place and make sure to provide it to your nanny.
- Use your EIN when filing taxes or reporting your nanny’s wages to the IRS.
- If you hire multiple nannies or have other household employees, you only need one EIN for your household.
Remember, obtaining an EIN is a crucial step in paying your nanny legally. It helps ensure that you are meeting your tax obligations and treating your nanny as a legitimate employee. By following the proper procedures, you can avoid potential legal issues and maintain a positive working relationship with your nanny.
Payroll Taxes You Need to Withhold and Report
When it comes to paying a nanny legally, it’s important to understand the payroll taxes you need to withhold and report. By following the correct procedures, you can ensure that both you and your nanny are in compliance with the law. Here are the key payroll taxes you need to be aware of:
Social Security and Medicare taxes
As an employer, you are responsible for withholding Social Security and Medicare taxes from your nanny’s wages. These taxes, also known as FICA taxes, help fund retirement benefits and healthcare for the elderly and disabled.
The current Social Security tax rate is 6.2% and the Medicare tax rate is 1.45%. Both you and your nanny are required to contribute to these taxes, with each party responsible for half of the total amount.
Federal income tax withholding
In addition to Social Security and Medicare taxes, you may also need to withhold federal income tax from your nanny’s wages. The amount of federal income tax to withhold depends on your nanny’s filing status and the number of allowances they claim on their W-4 form.
To determine the correct withholding amount, you can use the IRS withholding calculator or refer to the tax tables provided in Publication 15 (Circular E), Employer’s Tax Guide.
Federal unemployment tax (FUTA)
Another payroll tax you need to be aware of is the Federal Unemployment Tax (FUTA). This tax helps fund unemployment benefits for workers who have lost their jobs. As an employer, you are responsible for paying FUTA tax on the first $7,000 of your nanny’s wages.
The current FUTA tax rate is 6%, but you may be eligible for a credit of up to 5.4% if you pay your state unemployment taxes on time.
It’s important to note that payroll tax rates and regulations may vary depending on your location, so it’s always a good idea to consult with a tax professional or refer to the IRS website for the most up-to-date information.
By understanding and fulfilling your payroll tax obligations, you can ensure a smooth and legal employment relationship with your nanny.
Comply with Labor Laws Regarding Pay and Benefits
When hiring a nanny, it is essential to comply with labor laws to ensure fair and legal employment practices. This includes understanding and adhering to regulations regarding pay and benefits. By doing so, you not only protect yourself as an employer but also demonstrate your commitment to treating your nanny with respect and fairness.
Minimum wage and overtime
One of the first things to consider when paying a nanny legally is ensuring they receive at least the minimum wage. The federal minimum wage in the United States is currently $7.25 per hour, but it may vary depending on your state or local laws.
It’s important to check the regulations in your area to ensure compliance.
Additionally, if your nanny works more than 40 hours in a week, they are entitled to overtime pay. This typically means paying them 1.5 times their regular hourly rate for every hour worked beyond 40 hours.
It’s crucial to keep accurate records of your nanny’s hours to calculate their overtime correctly.
Meal and rest breaks
Just like any other employee, nannies are entitled to meal and rest breaks. However, the regulations regarding these breaks can vary depending on your location. Some states require specific lengths and frequencies of breaks, while others may leave it up to the employer’s discretion.
It’s important to familiarize yourself with the laws in your area and ensure your nanny gets adequate breaks during their working hours.
Workers compensation insurance is another crucial aspect to consider when employing a nanny. This type of insurance provides coverage for medical expenses and lost wages in case your nanny gets injured on the job.
It is generally required by law in most states, and failing to provide workers compensation coverage can result in severe legal consequences. Be sure to consult with your insurance provider to ensure you have the appropriate coverage.
Paid leave benefits
Providing paid leave benefits, such as sick leave and vacation time, is an excellent way to take care of your nanny and ensure their well-being. While there may not be specific legal requirements for paid leave benefits for nannies, offering these benefits can help attract and retain top-notch talent.
It’s important to establish clear policies regarding paid leave and communicate them effectively to your nanny.
For more information on labor laws and regulations, you can visit the official website of the U.S. Department of Labor: www.dol.gov. This website provides comprehensive information and resources to help employers understand and comply with labor laws.
File Schedule H with Your Personal Tax Return
When it comes to paying a nanny legally, one important step is to file Schedule H with your personal tax return. Schedule H is a tax form specifically designed for household employers to report and pay employment taxes for their household employees, such as nannies, babysitters, and caregivers.
By filing Schedule H, you ensure that you are in compliance with the law and fulfill your tax obligations as an employer.
Why is Schedule H Important?
By filing Schedule H, you are not only fulfilling your legal obligations, but you are also protecting yourself and your nanny. It provides a record of wages paid, taxes withheld, and Social Security and Medicare taxes paid on behalf of your nanny.
This documentation can be important for both you and your nanny in the future, such as when applying for Social Security benefits or verifying employment history.
How to File Schedule H
Filing Schedule H is relatively straightforward. When you file your personal tax return, you will attach Schedule H to it. The form will ask for information about your household employees, such as their names, Social Security numbers, and wages paid.
You will also need to calculate and pay the employer’s share of Social Security and Medicare taxes, as well as any federal unemployment taxes.
It’s important to note that if you use a tax professional or software to prepare your taxes, they will typically include Schedule H as part of the process. They will guide you through the necessary steps and ensure that all the required information is included.
Resources for Filing Schedule H
If you’re unsure about how to fill out Schedule H or have any questions, there are resources available to help you. The Internal Revenue Service (IRS) website is a great place to start. They provide detailed instructions on how to complete Schedule H, as well as answers to frequently asked questions about household employment taxes.
You can also consider consulting with a tax professional who specializes in household employment taxes. They can provide personalized guidance based on your specific situation and ensure that you are meeting all your legal obligations as an employer.
Remember, paying a nanny legally is not only the right thing to do, but it also protects both you and your nanny. By filing Schedule H with your personal tax return, you can ensure that you are complying with the law and fulfilling your tax responsibilities as a household employer.
Provide a Form W-2 by January 31
When paying a nanny legally, it is important to comply with tax regulations and provide the necessary documentation. One crucial step is to provide a Form W-2 to your nanny by January 31 of each year. The Form W-2 is used to report wages and taxes withheld from your nanny’s paycheck.
This form helps your nanny accurately report their income when filing their personal tax return.
The Form W-2 should include important information such as your nanny’s name, address, and social security number. It should also include details about their wages, tax withholdings, and any other compensation they may have received.
It is essential to ensure the accuracy of the information on the Form W-2 to avoid any potential issues with the IRS and to provide your nanny with the necessary documentation for their own tax purposes.
If you are unsure about how to fill out the Form W-2 or have any questions regarding tax obligations when employing a nanny, it is advisable to seek professional advice from a certified public accountant or a tax attorney.
They can assist you in understanding the specific requirements and ensure that you are fulfilling your legal obligations while paying your nanny.
For additional information and resources related to tax obligations when employing a nanny, you can refer to the official website of the Internal Revenue Service (IRS) at www.irs.gov. The IRS provides comprehensive guidelines and forms that can help you navigate the process of paying a nanny legally and staying compliant with tax regulations.
Following the necessary steps to pay household employees like nannies “on the books” takes some effort. But it ensures you comply with IRS and labor regulations while providing your nanny with important worker protections and benefits.
While you can choose to pay a nanny under the table in cash, doing so puts you at risk of tax evasion charges and fines. It also leaves your nanny vulnerable without payroll tax contributions and labor law rights.
By reviewing the requirements, filing the paperwork, and issuing the proper tax documents, you can feel confident your nanny is being paid legally. While the process involves some work, the peace of mind and avoidance of penalties makes it well worth the effort.