Nanny Taxes - FAQ's
From: Breedlove and Assoc
Q. I hired a Nanny. Is she my employee or an independent contractor?
A. Nannies and most other household workers are employees of the family for which 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.
If you think your worker might be an independent contractor, feel free to call our toll free help line at 888-273-3356. You can also petition to the IRS using Form SS-8; however, that ruling will take approximately 6 months.
Q. What employee taxes need to be withheld?
A. Your employee's taxes usually range from 15-20% of gross wages. These include:
- Half of Social Security & Medicare (7.65%)
- Federal income taxes
- State income taxes (if applicable)
- Other state taxes (a few states have small taxes for things like disability insurance)
Q. Do I have taxes as a household employer?
A. Yes, household employers can expect to pay employment taxes that amount to approximately 9-10% of their employee's gross wages. These include:
- Half of Social Security & Medicare (7.65%)
- Federal and State Unemployment Insurance
- Other state taxes (a few states have small taxes for things like workforce training)
Q. As an employer, can I take advantage of any tax breaks?
A. Yes. To lighten the financial burden for working parents, Congress has enacted tax benefits for families through employer-provided dependent care assistance (Dependent Care Account) and the Tax Credit for Child or Dependent Care. However, these tax breaks are only available if the employee is paid legally.
- Dependent Care Account (also called "Flexible Spending Account"). Most companies allow employees with child or dependent care expenses 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.
- strong>Tax Credit. For those who don't have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care (Form 2441) on their income tax return at year-end. Basically, they 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 depending on number of dependents.
For many families, the tax savings actually exceed the employer's share of the taxes, meaning families can save money by being legal!
Q. What about overtime pay?
A. According to federal law, household employees are entitled to overtime pay. Overtime must be paid at 1.5 times the regular hourly rate for all hours worked over 40 in a 7-day work week. If a household employee is paid a salary based on a work week of more than 40 hours, the employment agreement should explicitly state the regular and overtime rates of pay.
For example, an employee and family agree upon a gross salary of $600 per week for a 45-hour work week. The standard wage for the first 40 hours is $12.63 per hour; the overtime wage for the remaining 5 hours per week is $18.94 per hour; and the total weekly salary is $600.
No limit is placed on the number of hours worked in a 7-day work week, as long as the employment contract is fulfilled and the employee is fairly compensated. Please note that live-in household employees do not have to be paid overtime but are entitled to regular pay for every hour worked. (Exception: live-in employees in New York state must be paid overtime for hours over 44 in a work week).
Q. What are the vacation, holiday and sick pay requirements?
A. Household employers are not required to provide paid vacation, holidays and sick days. (Exception: San Francisco families must provide paid sick leave based on hours worked). These benefits should be agreed upon as a part of the employment contract.
Q. What is the process for handling payroll and taxes?
A. The payroll and tax process is quite detailed. Here's an overview of what's involved:
- Research employment tax and labor laws to understand legal obligations.
- Register for federal and state tax accounts.
- Complete and file New Hire Reporting.
- Identify and calculate taxes to withhold each pay period.
- Track gross pay, net pay and taxes withheld.
- Calculate the employer's federal and state tax liabilities.
- Prepare and file state and federal tax returns quarterly and remit the employer and employee taxes.
- Prepare year-end tax documents (Form W-2, Form W-3, Schedule H and State Annual Reconciliation).
- Respond to IRS and state inquiries.
- Monitor ever-changing household employment tax law.
Comprehensive services offered by Breedlove & Associates can make this compliance process simple, painless and affordable.
Q. What is Workers' Compensation?
A. Every state has a worker's compensation system. Under these systems, workers who become ill or injured on the job are entitled to medical and lost-wage benefits with a minimum of legal formality and expense. The systems are based on the idea that the employee gives up the right to sue for any injuries from work-related accidents in exchange for receiving benefits regardless of fault. Some states exclude household services from the workers' compensation system. To learn if your state requires Worker's Compensation, click here. If you are required to carry it, or if you elect to carry it voluntarily, please check with your homeowner's insurance provider first. Often, umbrella homeowner's policies cover domestic workers so you may already be covered. If not, they can usually add a rider over the phone.
Q. Are there any tax breaks if I offer health insurance?
A. Yes. When a household employer contributes toward health insurance premiums, these dollars are not considered taxable income, meaning neither employer nor employee is required to pay taxes on that portion of the compensation. Families may choose to pay the healthcare premium directly to the health insurance company or give these dollars directly to their employee. If the health insurance contribution goes directly to the employee, the family must keep a copy of a current health insurance card as proof of insurance.
Q. Can I run my Nanny's payroll through my own business?
A. No, this is illegal. Here's a simple explanation: All businesses are allowed to take tax deductions on employee payroll. The logic is that employees are direct contributors to the success of the business, and therefore the owner is allowed a tax break on payroll to offset some of this business expense.
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 take a personal tax break on her payroll as a childcare expense.
A. At Breedlove & Associates, we vigilantly protect the privacy and security of our clients' personal and financial information. First, we utilize state-of-the-art encryption technology to safeguard all information relating to our clients and their employees. Second, client information is never sold, loaned, traded, disclosed, or shared with any third parties. Third, we restrict information access to: a) our employees who require access in order to provide tax and payroll services, b) federal and state tax entities in adherence with tax reporting requirements. Fourth, we invest in rigorous document security and on-site document destruction. Finally, we utilize the most secure electronic payment and funds transfer companies and protocols available.
Our procedures exceed recommended Best Practices for information security and privacy and have resulted in zero breaches since we were formed in 1992. As technologies change, we promise to continually update our technologies and procedures in order to maintain the highest standards of privacy and security - ensuring that every one of our clients and their employees can continue to have complete peace of mind regarding their personal and financial information.
Breedlove & Associates, L.P.