Your Nanny Payroll Guide: Learn the Basics

Jenna Shields
SurePayroll

There is nothing more important than doing what’s best for your family. For some, this means hiring a nanny to care for your children. While this sounds like a simple task, there are many details to consider. From finding a nanny to calculating payroll taxes, there will be a lot on your plate. Fortunately, once you learn more about the process, everything will come together.

First things first, you need to understand the ins and outs of the “nanny tax.” With the right knowledge, you can successfully:

- Avoid large penalties and fines;
- Ensure that you’re following all rules and regulations set forth by the IRS and other tax authorities;
- Protect yourself as an employer; and
- Allow your nanny to build his/her employment history.

As you can see, there are some important functions involved in nanny payroll.

What is the Nanny Tax?
Don’t let this tax confuse you. It’s nothing more than the money you withhold from your nanny’s pay, combined with taxes you’re required to pay as an employer. You must withhold the following taxes each pay period:

  • Federal income tax;
  • Social Security and Medicare (FICA); and
  • State income tax.

Simple enough, right? Well, unfortunately, there are a couple other things you need to know:

  • Income tax rates differ from state to state, so you need to understand what’s expected of you based on where you live.
  • As an employer, you’re also required to pay a matching percentage of Social Security and Medicare.
  • Employers are also required to pay federal unemployment insurance taxes.

Do I Have to Pay Nanny Taxes?
It’s only natural to ask this question, as avoiding nanny payroll altogether could save you time and money. However, the IRS makes it clear with regard to who has to pay nanny tax. You are considered a household employer if you meet one of the following requirements:

  • You pay a household employee more than $1,000 in a quarter.
  • You pay a household employee more than $2,000 in a calendar year.

You can review IRS Publication 926 (2016), Household Employer's Tax Guide at irs.gov/publications/p926 for more information on requirements and exceptions.

What about paying a nanny with cash? Many people think they can avoid the nanny tax by paying their nanny under the table. As tempting as this may be, you want to avoid it at all costs. Since it is an illegal practice, you could soon find yourself faced with paying back taxes, plus interest and penalties. Furthermore, in the most serious of situations, you could face tax evasion charges.

Answer These Questions to Get Started
At this point, you should feel better about your ability to hire a nanny and pay the necessary taxes. To ensure you’re on the right track, you may want to answer these questions:

  • Have you collected the necessary information from your household employee?
  • Have you taken care of all the required employer forms?
  • Are you familiar with the benefits of hiring a professional payroll company?
  • What will you do in the future to avoid time-consuming and costly mistakes?
  • Are you and your nanny on the same page regarding your financial arrangement?

When you address these questions in the early days of working with a nanny, it’ll give you peace of mind in the future. iBi

Jenna Shields is a working mother and a communications consultant for SurePayroll, provider of online payroll services nationwide.

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