Hiring a Nanny: Tips on Handling Taxes and Other Costs

The joys of parenthood abound but the cost of being a parent can quickly add up.

For example, opting out of traditional childcare settings and hiring a nanny instead could end up costing you more than you anticipated.

Why?

Hiring an au pair or nanny might not be as simple as paying someone cash for their services when you are able to.

According to labor laws:

You’ve got to treat nannies like household employees.

This opens up a slew of requirements that you’ve got to observe to avoid getting hit with massive penalties or lawsuits.

Now:

It doesn’t have to be a huge hassle if you understand what the law requires and how to employ your household workers properly.

Here are some nanny hiring tips to get you started.

Hiring a Nanny at the Right Rate

Once you know that you’d like to hire a nanny, you should do is determine how much you’ll pay them.

You can look on websites like SitterCity.com or Care.com for ideas of what nannies are charging. If you download the app, Chime by SitterCity, you’ll see what part-time babysitters are charging in major markets as well.

With this information, you can get an idea of the hourly rate you should advertise to nanny candidates.

You should know that the hourly rate, however, is just the beginning of the pay structure.

Compensation beyond wages

If you will be employing someone as a nanny (not just a part-time sitter) you will need to consider the additional cost of being an employer, too.

Though payroll taxes are one side of the employer costs, you should also understand requirements that could include:

• workers’ compensation insurance
• paid sick leave
• overtime laws
• reimbursement requirements for things like mileage and other expenses

So:

when you get ready to set a rate for your nanny, you should know that your total out of pocket costs could be quite a bit more than just the base hourly rate.

Nanny Tax

The reality you must accept:

Your nanny is considered your employee.

You might be tempted treat your nanny like a babysitter or independent contractor to avoid the payroll burden that comes with hiring a nanny but don’t.

If your in-home childcare provider:

• Cares for your children for extended periods of time while you are away
• Works in your home part-time or full-time
• Must adhere to a regular care schedule that you set for them
• Follows directions for care or other tasks based on your instructions
• Performs additional tasks like meal prep or errand running

Then, you’ve got a true nanny situation on your hands.

Your nanny must be treated as such which requires the establishment of a formal employment relationship.

This means:

You're required to withhold certain taxes from their wages.

If you pay your nanny more than $2,200 for their work in 2020, you’ll be required to pay 7.65 percent for Social Security and Medicare taxes (and withhold the other 7.65 percent on behalf of the household worker.)

If you plan to pay your nanny $1,000 or more in any calendar quarter, you’ll also be responsible for federal unemployment tax on the first $7,000 of their wages.

Currently, the federal unemployment tax rate (FUTA) is 6 percent.  

However, the federal government typically gives employers a 5.4 percent credit when they pay their state unemployment tax (SUTA) on time. This can bring the effective FUTA rate down to 0.06 percent.

Hiring and Forms

When you commit to hiring your nanny, you’ll also want to observe the proper onboarding process which could include one or more of the following:

• Completion of a W-4 form
• Completion of an I-9 form
• An employment contract

Form W-4

Form W-4 records the proper social security number and withholding preferences for your household worker.

Form I-9

Form I-9 ensures they are eligible to work in the United States. The form requires that your nanny presents proper identification that is verified on this form.

Employment contract

Finally, the employment contract spells out the terms and conditions of the work arrangement.

Though the employment contract may not be required, it can be helpful should any disputes or misunderstandings arise.

It should outline payment rate, duties, work schedule, and other terms pertinent to their employment with you.

Perhaps the most important detail:

Outline how income taxes will be handled between you and your nanny.

Though you must withhold and remit Social Security, Medicare and state tax deductions on behalf of your nanny, federal income tax could be paid by your nanny on their own.

It’s best, however, to detail the exact arrangement in writing so no one drops the ball on this requirement.

Additional forms

There’s additional paperwork you should be aware when hiring a nanny, too.

They can include one or more of the following:

• Schedule H
• W-2
• W-3

As the employer, you must file a Schedule H with your own taxes.

This schedule reports  Social Security, Medicare, unemployment tax and other deductions or income withheld from you nanny’s wages.

You’ll need to get this same information to your nanny via the W-2 that’s due to them by the end of each January.

The W-3 contains the same information as the W-2 but you will have to give it to the Social Security Administration (along with additional copies of the W-2 form.)

Employment Laws

Not only do you have to comply with employment tax requirements, you have to be aware of employment laws that cover nannies and similar household workers.

There are both federal and state requirements that govern the way you treat and pay your nanny.

They could include rules like:

• Being paid for every hour worked (no salaried arrangements permitted)
• Being paid overtime when they work more than 40 hours per week
• Nanny’s must have workman’s compensation in states that require it
• Nanny’s are entitled to receive regular pay

If you are found to be in violation of labor laws, your nanny could file a grievance against you which might require additional compensation, give rise to a lawsuit or both.

So:

It’s important that you understand exactly what you are and not allowed to do when it comes to your nanny and their work environment.

Additional Costs and Considerations

In addition to nanny taxes and labor laws, there are other things you should think about when hiring a nanny.

For example, you may want to give the nanny certain types of benefits that could include:

• Health insurance
• Paid leave (sick time, holidays, vacations, etc.)
• Extra perks (like a food allowance or petty cash fund)
• Bonuses

Though these things may not be required by law, it could make your employment offer more competitive when it comes time to hire the perfect nanny.

Your potential caretaker probably has many options and they will likely choose the one with the most appealing package.

If you want to attract the best candidate to care for your children, you’ll want to consider adding some benefits to the total cost of employing your nanny.

On the bright side, you might be able to offset these additional costs if you are eligible for the child care credit.

You could also see savings by paying for your childcare with pre-tax income through a Flexible Spending Account (FSA).

Depending on your tax bracket it could make sense to choose one over the other, as you can’t “double dip” when it comes to saving on childcare with these options.

Payroll Services

Fortunately, you don’t have to figure all of this stuff out on your own.

There are plenty of nanny agencies and payroll companies who are familiar with the laws and requirements for nanny employment for your country and state.  

Some nanny services can help you recruit, hire and onboard a nanny, while others will take care of just the payroll portion for you.

Either way, make sure you include nanny payroll services into the total cost of employing and paying your nanny.

Though the costs for employing a nanny might seem overwhelming, it beats taking the time to figure it all out on your own.

Paying "under the table"

All too often, people simply pay cash (aka. under the table) and avoid dealing with the hassle of setting up payroll properly when hiring a nanny.

If you try to bypass doing things the right way, you could trigger an audit for your household for failure to pay employment tax.

That means:

If you’re found guilty, you could be hit with penalties and interest to the tunes of tens of thousands of dollars!

So, in the long run, the cost of employing your nanny could be much higher if you go about it the wrong way anyway.

Get some help and rest assured you’re doing right by your children and your nanny.