When Hiring a Nanny Makes You an Employer for Tax Purposes

You and your spouse have made the decision to change the way you handle childcare. Rather than sending the kids off to a daycare or preschool program, you have decided it is better to bring a nanny into your home. That’s great. Are you ready to take on the responsibilities of being an employer for tax purposes? Those responsibilities are not earth shattering or difficult, but they are real.

There is a point at which childcare help crosses the employment line. Childcare providers who meet certain criteria are no longer self-employed contractors. They are household employees who have to be treated as such. As employers, parents are asking for trouble if they ignore the obligations that come with having household employees.

Correct Employee Classification

The presence or absence of the previously mentioned obligations are rooted in how a nanny or babysitter is classified. The IRS draws a distinction between self-employed contractors and standard employees. We will not go through the details here, but a nanny or sitter is a household employee if the following general conditions are true:

  • He or she provides services primarily in the parents’ home
  • Parents manage and control the nanny’s work hours
  • Parents manage and control the nanny’s work responsibilities
  • The nanny does his or her work with resources provided by the parents.

If a nanny or sitter provides childcare services in his or her own home, you could make the case that said person is an independent contractor. Likewise, if that person sets his or her own hours and provides all the resources necessary to offer adequate childcare.

Registering as an Employer

Household employee wages are exempt from taxation up to $2,100 per calendar year. Given that most people pay their nannies significantly more, reporting and taxation is generally required. As such, parents must register with the IRS as employers. Doing so is simple though.

All it takes is obtaining what is known as an employee identification number (EIN). Parents can get a number by visiting the IRS website or calling the agency directly. Numbers are issued instantly upon submission of basic information. A letter confirming the issuance of the EIN generally follows a few days later.

The EIN is the number used when reporting and paying payroll taxes. Dallas-based BenefitMall says that parents cannot use their Social Security numbers instead. They must, as employers, file for and use an EIN.

Documenting Work Eligibility

Next, parents have to follow federal regulations requiring the documentation of work eligibility. They would use Form I-9 to do so. Parents would request the appropriate documents from their nannies proving eligibility to work. They would make copies of those documents and attach them to form I-9. Completed paperwork must then be kept at the parents’ place of business – in this case, the home – and furnished upon request by IRS or state taxing authorities.

Withhold and Pay Taxes

Finally, parents who choose to bring on nannies as household employees must withhold and pay federal and state taxes. At the federal level, you are talking FICA (Social Security and Medicare) and income taxes. There may be federal unemployment tax (FUTA) as well. Taxes at the state level are typically limited to income and unemployment taxes.

It is important to note that employers pay a certain percentage of FICA and unemployment taxes. Thus, it is up to parents who choose to bring on nannies to understand what their share of the taxes is. Of course, parents can turn everything payroll related over to a certified public accountant or a third-party payroll provider like BenefitMall.

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