Tax Considerations When Hiring a Nanny
To satisfy the IRS and remain a happy law abiding citizen, you’ll need to assume the role of employer and pay employment taxes (Social Security, Medicare, etc.), report payroll withholdings (taxes, insurance benefits and the like) and of course, make sure that she is legally able to work in the United States.
Here are a list of quick steps to get started:
Obtain state and federal EIN (Employer Identification Numbers)
You can obtain a federal EIN instantly on-line or you can download the SS-4 form and mail it, or call the IRS. To obtain your state EIN, you’ll need to contact your state government.
Verify Work Eligibility
To verify U.S. work eligibility, you will need to complete an I-9 form and follow the U.S. Citizenship and Immigration Office’s procedures.
To satisfy the IRS and remain a happy law abiding citizen, you’ll need to assume the role of employer and pay employment taxes.
Setup Payroll and Withholding Tracking
You must track the amounts that you pay your nanny and the amounts that you withhold from her pay. You are not required to withhold federal income tax, however your nanny is required to pay federal taxes based on her income. You may choose to withhold though to save your nanny time and possible IRS fines for tax underpayment. If you choose to withhold, you will need your nanny to complete a W-4 form that you must keep in your records. You will use the information provided on the W-4 to calculate the federal withholding amounts. Periodically (usually at the end of each quarter) you must pay to the IRS the amounts you’ve withheld and also file a form 1040ES.
If you pay your nanny more than $2,300 (for tax year 2021), you are required to pay social security and Medicare tax. The amount you are required to pay is roughly 15.3% of her gross wages. You may pay the full amount yourself, or you may deduct 50% of the amount from your nanny’s wages. You’ll pay these taxes on a quarterly basis and at the end of the year, you’ll file a Schedule H to report the amounts.
End of Year Reporting
At the end of each year, you will need to report the wages you’ve paid and any withholding amounts. In most instances, you will file a Schedule H along with your regular 1040 tax return.
You will need to provide your nanny with a W-2 form detailing her gross wages and all withholdings and deductions for the year. You must provide your nanny with her W-2 by January 31st and you’ll need to report the wage information to the IRS by February 28th using a form W-3.
If you’d rather spend time enjoying your free time and let someone else manage your tax payment and filing requirements, there are numerous companies that provide the service to nanny employers, such as PayCycle and Breedlove Associates.
We’re not tax professionals and this information is provided to help you perform your own due diligence and research related to hiring a nanny. As with all tax matters, we recommend that you consult with a professional tax advisor or Certified Public Accountant.