- Is a nanny an employee, or can she be classified as an independent contractor?
- If a nanny is an employee, what taxes need to be withheld?
- Do I have taxes as an employer?
- What are my tax breaks?
- Are there tax breaks for hiring a short-term or temporary nanny?
- What about overtime pay?
- What are the vacation, holiday and sick pay requirements?
- What is the process for handling payroll and taxes?
- What is Worker’s Compensation?
- What should I know about Nanny Health Insurance?
- Can I run my nanny’s payroll through my own business?
- What About Taxes and Our Temporary Nanny?
- What Records Am I Required To Maintain?
- IRS & Dept. of Labor Rulings about Au Pairs   opens in new tab
Is a nanny an employee, or can she be classified as an independent contractor?
Nannies and most other household workers are employees of the family for which they work. If the family controls work hours, work place, responsibilities, work tools (to name just a few), the worker is their employee. An independent contractor usually provides her own tools, her own place of work, sets her own hours and offers services to the general public.
The IRS views household workers to be employees – with very few exceptions. If you’d like a formal ruling, you can obtain one from the IRS by filling out Form SS-8.
If a nanny is an employee, what taxes need to be withheld?Your nanny’s taxes usually range from 15-20% of gross wages. These include:
Note: By law, employers are required to withhold Social Security and Medicare taxes from their employee’s salary each pay period. Withholding income taxes is optional, but it’s highly recommended so that your employee does not get surprised with a large tax obligation at year end.
Half of Social Security & Medicare (7.65%)
Federal income taxes
State income taxes (if applicable)
Do I have taxes as an employer?Yes. Household employers can expect to pay employment taxes that amount to approximately 10% of their employee’s gross wages. These include:
Half of Social Security & Medicare (7.65%)
Federal and state unemployment insurance
Good News! The employer tax obligation can be largely – if not completely – offset by tax breaks.
Are there any tax breaks available to me?That depends on your specific circumstances. To lighten the burden that falls on 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 - and some tac credits and deductions are limited based on household income.
Dependent Care 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.
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% of qualifying childcare expenses. But only expenses of up to $3,000 for one dependent, or up to $6,000 for two or more dependents can be counted.
Note: Only one of these tax savings options may be used each year. The Dependent Care Account usually provides the greater tax savings. Oftentimes, the tax savings exceed the employer’s share of the taxes, actually saving money by being legal!
Are there tax breaks for hiring a short-term or temporary nanny?Families who hire on a short-term (i.e. summer nannies), part-time or shared basis have a unique tax advantage. Since employer taxes are tied to wages, these families typically have a much smaller tax obligation but still get to take full advantage of the tax breaks. Here's an example:
The Smiths hire a summer nanny and pay her $500 per week for 13 weeks ($6,500 total). The Smiths have access to a flexible spending account at work, which allows them to pay for up to $5,000 of childcare-related expenses using pre-tax dollars. This saves them $2,300. Meanwhile, the Smiths owe about $600 in employer taxes. The net savings for the Smiths is $1,700!
As you can see, legal pay pays off – especially in short-term, part-time or NannyShare (nanny-share) employment situations.
Do I have to pay overtime?According to federal law, household employees are entitled to overtime pay. Overtime must be paid at 1.5 times the hourly wage for all hours worked over 40 in a 7 day workweek. If a nanny is paid a salary, overtime should be addressed in the contract.
A nanny 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 additional 5 (overtime) hours per week is $18.95 per hour (12.63 X 1.5)
And the total weekly salary = $599.95.
No limit is placed on the number of hours worked in a 7 day workweek, 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 the regular wage for every hour worked.
[Childcare Solutions Notes:]
1. Overtime laws and regulations may not be waived by agreement between the family and the care-provider. This is FEDERAL law. State laws, which vary widely, may go beyond the federal law, but may not under any circumstance nullify federal law. Be sure to check with your state's depratment of labor (hours & wage division) to determine your local minimum wage rate and applicable overtime regulations.
2. The method used to calculate overtime wages can vary depending on whether a nanny is employed "at-will" and paid on a weekly basis or if she is under contract to work a specified number of hours per week. The U.S. Department of labor specifies one method of wage calculation that shall be used for employees working "at will". If your nanny is under contract to work a specific number of hours per week, it may be advantageous to use an alternate method of calculating the 'standard hourly wage rate' and the 'overtime hourly wage rate'. Please see the "Nanny Wage Rate Calculations" section of our "How Do We Compensate Our Nanny?" FAQ for details and examples.
On september 11, 2013, the Department of Labor announced new regulations which will apply to the wages of Live-In care providers. Beginning Jan 1 2015, live-in nannies must be compensated the same way that live-out nannies are now, with time-and-a-half (overtime) wages paid for all hours worked over 40 hours in a workweek. See the Dept. of Labor website for details.
Click HERE for our Nanny Salary/Wage & Overtime Calculator for employees under contract.
Click HERE for a listing of STATE DOL offices and websites.
Click HERE for an interactive map that will display the current Minimum Wage in your state.
What are the vacation, holiday and sick pay requirements?Paid vacation, holidays and sick days are not required by law. These benefits are to be agreed upon as a part of the employment contract. In addition, overtime is not required for holidays worked.
What is the process for handling payroll and taxes?The payroll and tax process is quite detailed. Here’s an overview of what’s involved:
Comprehensive payroll and tax services specially designed for household employers are available to make this process simple and provide peace of mind at an affordable price. Ask us for a referral.
- 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 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.
What is Worker’s Compensation?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.
While some states exclude household services from the worker’s compensation system, the State of Ohio requires all employers to carry a Worker's Compensation policy AND to report employee compensation of $160.00 or more per quarter.In Ohio, Domestic workers are those employees who are hired to work in and around the home.If a domestic worker earns $160 or more from one employer during a calendar quarter, the employer is required to provide workers compensation coverage for that domestic worker. BWC defines a calendar quarter as any consecutive 13-week period.
Job duties of domestic workers would include:
OHIO WORKERS COMPENSATION RESOURCES
For detailed information about Ohio Worker's Compensation requirements and procedures you may call the Ohio Bureau of Worker's Compensation (BWC) at 800-644-6292... or call Breedlove & Associates at 888-273-3356 for a complimentary consultation.
Are there any tax breaks if I offer health insurance?see: IRS Publication 969
Yes. And they can be significant for both you and your employee.
When a household employer contributes toward 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 or give these dollars directly to their employee. (In the latter case, the family must keep a copy of a current health insurance card on file for proof of a current insurance policy)
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 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.
December 2010 - Update
New Health Insurance Tax Credit for Nanny Employers
The IRS recently published the details of the new Health Insurance Tax Credit for Small Employers, which includes households.
If an employer contributes to their employee's health insurance, they will receive up to a 35% tax credit on those contributions. So, in addition to health insurance being non-taxable to families and nannies, it now comes with added savings for families. This tax credit will take effect starting with the 2010 tax year, so this year's contributions will be applicable on your tax year 2010 Tax Return.
Example: The Smiths paid their nanny $25,000 during 2010 and also contributed $300 per month ($3,600 total) toward her health insurance. The Smiths' 2010 tax credit will be $1,260 ($3,600 x 35%).
- The employer must pay at least 50% of the premium cost;
- The average annual wages paid by the employer (to all employees on staff) must be $50,000 or less.
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 $900 per year in a tax refund 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. She does not have the option of paying for health insurance premiums with after tax dollars (as shown in the first part of the example) 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 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).
If you have any questions about health insurance or how to set it up so you can take advantage of these tax breaks, call Breedlove & Associates. Breedlove is happy to provide a complimentary phone consultation and guide you through all the financial and legal aspects of being a household employer.
Can I run my nanny’s payroll through my own business?Not usually. In most cases 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 the owner is allowed a “tax break” on a portion of total payroll to offset some of this expense. 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. A nanny is considered a contributing member of the household; therefore, a family is entitled to take a “tax break” on her payroll as a childcare expense instead.
The only exception to this is if the family is the 'sole proprietor' of the company AND if the company does not claim the nanny's wages as a business expense.
Please seek competent legal and tax accounting advice before paying your nanny through your company payroll.
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Here is a very good article on the subject of nanny taxes and payroll compliance from our friends at 4NannyTaxes.com.
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