While it’s a common misconception that nannies are independent contractors, it’s just that. Nannies are considered employees of the families for whom they work and as such, those families have tax and legal obligations.
The IRS has guidelines in place that differentiate employers from independent contracts and has ruled that nannies are employees of the family’s for whom they work and not independent contractors.
According to 4nannytaxes.com, if a worker is over the age of 18, works in your private residence and you pay them more than the annual wage threshold, $1800 for 2012, the worker is your employee. Nannies working in nanny share arrangements are considered employees of both families.
Unlike independent contractors, the nanny’s schedule, duties and responsibilities are provided to them by the parents and the parents provide the materials required for the nanny to do her job, like a crib and baby bottles for example. These things alone disqualify nannies from being independent contractors.
Since nannies are considered employees, they must be provided with a W-2 at the end of each year.
The only practical exception to this rule is if a family hires a nanny through an agency and pays the agency directly for all nanny related services and the agency then pays the nanny. In this case, the nanny would be the employee of the agency.
The IRS is cracking down on worker misclassification. Parents who misclassify their nanny may be subject to back taxes, fines and penalties when caught.
While many nanny employers simply put their nanny on their company’s payroll, paying a nanny this was is illegal. The expenses associated with hiring household employees may provide personal tax breaks, since the nanny is not a direct contributor to the success of the business; she is not qualified to be classified as a company employee.
Fair Labor Standards Act
Nannies are considered non-exempt workers and as such are protected under the Fair Labor Standards Act. Under this act, all nannies are required to be paid at least minimum wage for all hours worked. Live-out nannies and live-in nannies in some states, are also entitled to an overtime differential of 1.5 times their base hourly rate for all hours worked over 40 in a 7-day period.
Nannies and parents often agree on a weekly salary when discussing the nanny’s wages. Since nannies are considered non-exempt employees, they cannot be paid a straight salary. If a live-out nanny works 50 hours, for the salary to be complaint, the nanny’s wages must be broken down into a base hourly wage rate for the first 40 hours and an overtime hourly wage rate calculated at 1.5 times the base hourly wage rate for the wages to be compliant.
Employer Tax Obligations
As with other employers, household employers do have tax obligations. The tax obligations total approximately 10% of the nanny’s gross annual wages. For nanny employers who pay their nannies legally and adhere to tax laws, they are tax breaks that can offset this expense.
IRS publication 926, “Household Employer’s Tax Guide,” available at www.irs.gov, provides detailed information on the tax responsibilities of household employers.
Household employers, including nanny employers must withhold and pay their share of Social Security and Medicare taxes. These taxes together are called FICA. The employer’s share is equivalent to 7.25% of the nanny’s gross annual wages.
Household employers are also responsible for submitting the nanny’s share of FICA which is an additional 7.65%. Nannies cannot submit these payments – doing so is the employer’s responsibility. Since the responsibility to ensure they are paid falls with the employer, many nanny employees just cover the cost to ensure they are paid.
The Federal Unemployment Tax Assessment (FUTA) is another tax responsibility that lies with nanny employers. This tax is also based on the nanny’s gross annual earnings; however, there is a cap on this tax that limits it to $45 per year.
Nanny employers are also responsible for their State Unemployment Tax Assessments. The amount of the tax will vary from state to state, so nanny employers should check with their state to determine the current tax rate. In addition to SUTA, some states have additional taxes that nanny employer’s may be required to pay. Some states also require nanny employers to purchase worker’s compensation policies. Nanny employers should check with their state to determine if they are required to carry coverage.
Nanny Tax Obligations
Nannies are responsible for paying their own federal and state income taxes. While nanny employers are not required by law to withhold and submit their employee’s federal and state income taxes, most employers do agree to doing so when ask. When employers withhold and submit on behalf of their nanny is reduces the risk of the nanny incurring a large tax bill that she may not be able to financially handle.
Benefits to Paying Legally
For employers who have access to a dependent care or flexible spending account, they may be able to save several thousands of dollars per year through tax benefits and breaks. Even parents who do not have access to these accounts may be eligible for other tax credits for child or dependent care. These saving can amount to $600 to $1200 per year, depending on the number of dependents requiring childcare.
Benefits to Being Paid Legally
For nannies, being paid legally is important if they wish to establish job history and qualify for credit. A nanny with no proof of income will be hard pressed to get an auto or home loan. In addition, when nannies are paid legally they pay into Social Security and Medicare, both which they may need access to in their later years. Nannies who are paid on the books are also eligible for unemployment benefits, should they be let go from a job for no fault of their own.
Payroll and Tax Services
For assistance with nanny payroll and tax services, parents may wish to use a reputable nanny payroll and tax company. Breedlove & Associates, HomeWork Solutions, and GTM Payroll Services, Inc., are all leaders in providing payroll and tax support to household employers.