22 Nov For Families Doing Nanny Taxes (8 simple steps for a smooth tax time)
Having a nanny in your home is a joy for everyone in the family; the children love her, you rely on her, and now the house is running like a fine Swiss timepiece. But gone are the days when your nanny was paid from your pocket and no one was the wiser. Today’s nanny is a professional caregiver, and she is compensated as such. That means she is a true employee of yours, and consequently you must ensure that your taxes are paid, promptly and properly, for this addition to the household. You must also be sure to withhold appropriate benefits from her pay check, and that can intimidating if you haven’t done it before. What deductions? How much? How often should I pay them?
If this is indeed the first year you’ve had a nanny in your employ, it can all seem a bit daunting. But not to worry – we have eight concise steps you should follow to make tax time a breeze. Well, maybe not a breeze – is tax time ever a breeze, for anyone? But using these guidelines will avoid complicating your life with a phone call from the IRS – who needs that headache? These steps will make income tax preparation straightforward and relatively painless – and that’s the most we can hope for at that time of year, right?
1. Your Nanny Needs a W-2
You’ve hired her, she’s moved in, and everyone’s schedule is running more smoothly. However, as soon as you’ve chosen the right nanny, offered her the position and she’s accepted, you need to get her a W-2, as she is now a bona fide household employee. Without this crucial form, you’ll be considered evading taxes, and ignorance is not an excuse with the IRS. If you’re unsure about this critical first step, ask us before your nanny begins her placement, or call your accountant and explain your new set up at home.
2. Get a State & Federal Employer I.D. Number
This is called a FEIN, which stands for federal employer identification number. It will identify you to the IRS from here on in, on all your forms at tax time. You should apply for these as soon as your nanny accepts the job.
3. File a New Hire Report with the State
As soon as you and your nanny have agreed to terms, it’s vital that you file a “new hire” report with the state. This apprises tax officials of your new employee, the date she started, and other crucial information. This is something you must take care of immediately – don’t delay, even for a week or two.
4. Withhold Federal & Possibly State Income Taxes
When you pay your nanny, whether it’s weekly, biweekly or even monthly, it’s up to you to withhold all appropriate taxes from her pay. That varies, of course, depending on her salary. Talk to your accountant or ask us for help -we are more than happy to give you whatever information you need.
5. Withhold Social Security & Medicare
As her employer, it’s your responsibility to hold back Social Security contributions and Medicare, and unemployment insurance. Again, the amounts will depend upon her salary. The IRS or your accountant can give your the appropriate figures, depending on her income. These taxes are collectively known as FICA and must be withheld from your nanny’s pay. Social Security taxes will be 6.2 percent of your nanny’s gross (before taxes) wages and Medicare taxes will be 1.45 percent of their gross wages.
6. File State Household Employer Tax Returns
Think of your home as a company, and your nanny as its sole employee. You’re head of this “business,” and it’s imperative that you file a separate return as such.
7. Pay Estimated Taxes Four Times a Year
To make your tax burden a little less onerous, the IRS suggests paying them quarterly. After all, no one wants to get hit with a massive tax bill at the end of January, right? Lessen the impact by giving the IRS its payments every quarter.
You’ll send in the FICA taxes and federal income taxes withheld from your nanny along with the FICA taxes and federal unemployment insurance taxes you owe as a household employer during the following time periods:
- January – March (paid in April)
- April and May (paid in June)
- June – August (paid in September)
- September – December (paid in January of the next year)
8. Do Your Annual Returns Promptly
Doing taxes is rather like going to the dentist; not joyous, to be sure, but a necessity in life and unwise to avoid. For good economic health, paying taxes is necessary and beneficial to society as a whole. Consequently, it’s important that you file on time, by the end of January. Once the calendar year ends, you’ll need to provide your nanny with their W-2 and file Form W-2 Copy A & Form W-3 with the Social Security Administration.
If you need assistance now that you have a new nanny, we at Elite Nannies are happy to oblige. Or ask your CPA for guidance; she may have many clients in a similar situation and will know all the rules and regulations involved now that you’re a “household employer.”
Each state has different rules and regulations about income tax, so we can’t be more definitive because so much depends on where you live. But these eight guidelines apply everywhere; it’s only the amounts that vary depending on your location and on your nanny’s salary.
Many of the IRS forms you must submit are now available online, as is much of the information you need as a household employer. Be sure to read everything you can before your nanny even moves in, so you don’t risk making a mistake and getting behind. We all know that the IRS doesn’t have much of a sense of humor, or a tolerance for excuses. So before you even offer your new nanny the position, find out what it’s going to mean for you come tax time.
You’ll be very glad you did, because there’s nothing worse than getting hit with a penalty for something you weren’t aware of. Forewarned is forearmed, as the saying goes, and at Elite Nannies, we can arm you with all the information you need to make tax time smooth sailing.