An intro to nanny taxes

Congratulations!

You have hired a household employee - or you are thinking about hiring one- And want to understand your employment tax obligations. This blog aims to provide a more clear insight about household employment taxes. We created this blog to step you through your responsibilities and advise how we can help. When you hire a nanny or other household employee you become an employer. 

The best thing you can do to preserve the integrity of the relationship with your nanny is to acknowledge your responsibility as an employer and take steps to protect you and your employee legally. The IRS is very clear that these workers are employees, NOT independent contractors, and that you, the household employer, are ultimately responsible for the reporting and remittance of any household employment taxes that may be due. Although we often refer to the employee as the “nanny”, the employer responsibilities described in this booklet apply to all household employees. Employer misclassification (calling the nanny a contractor instead of employee) and the resultant payroll tax avoidance are an enforcement priority for both the Obama Administration and many states. In 2011 twelve, the US Department of Labor and the Internal Revenue Service entered into a formal information sharing agreement to step up enforcement. Household employers are under increased scrutiny today. State unemployment funds are empty, and many are looking into the “cash wage” economy as a revenue source. 

Nannies and other household workers are more aware of their workplace rights as a result of educational outreach initiatives to the nanny community by organizations such as Domestic Workers United (DWU). The risks of non-compliance include responsibility for back payment of both employer and employee taxes, along with penalties and interest, wage and hour complaints and workers’ compensation insurance claims. Household employers who skip the employment taxes are most commonly ‘caught’ when a former employee files for unemployment benefits or an employee has an accident while working. The decision to pay your nanny “on the books” is not only in your best interest. It is in your nanny’s best interest to be paid fairly, to easily qualify for unemployment benefits if her job en ds and to be eligible for Social Security and Medicare down the road. 

The good news is that compliance with the “nanny tax” rules will qualify many families for tax breaks for childcare and/or eldercare expenses, offsetting the household employer taxes paid. To calculate them, use our nanny tax calculator at the top of the page.