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If you intend to raise a family and work in the US, childcare becomes essential. This is the only way to juggle commitments without stretching yourself to breaking point, especially considering that you may risk losing certain hard-won social security benefits if one parent chooses to stay home.
Luckily, US childcare is pretty comprehensive, including daycare, babysitters, and, as we’ll be discussing here, nannies. A nanny is a preferable option for many parents for a range of reasons, including:
- The ability to hand-pick someone suitable
- Stay-at-home care
- Familiar surroundings for children
- Lasting bonds with one reliable caregiver
Those are attractive benefits, indeed, but they do come with one downside - the cost. Even from the outset, a nanny can typically charge higher rates than a daycare center due to the focused on-site care that they offer. Initially higher rates aside, bringing a nanny into your home also means you’re classified as having a household employee according to IRS definitions.
Even an on-site babysitter that you pay once a week qualifies as a nanny in this sense. As such, you fall foul to nanny taxes, just as an employer must pay taxes for each member of staff.
If you’ve already gone through the process of applying for your green card and social security number, you don’t need us to tell you that keeping on top with taxes matters. As such, the simple answer as to whether you need to pay taxes for your nanny is a resounding yes. And, we’re going to look at the processes that can help you do just that.
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The When, What, and How of Nanny Taxes
You may be an employer in the eyes of the IRS, but the chances are that you have no real idea of the taxes required for such matters outside of your own employment. As such, you should begin the journey of paying your nanny and their taxes by doing your research. Firstly, you’ll need to determine whether taxes are necessary, before considering how you pay them, and your nanny in turn.
The first question you’ll want to ask yourself here is whether your nanny actually counts as a household employee. This may seem confusing after the above point, but there are rare cases in which a nanny does not fall under this classification. If, for instance, your nanny of choice classes themselves as self-employed and works with a range of clients, tax responsibilities fall to them rather than you.
In the majority of cases, though, a nanny who works solely for your family will require tax precautions from you as an employer. In this instance, it will be down to you to either pay or withhold nanny payments based on the following.
- Federal taxes (paid through the Electronic Federal Tax Payment System)
- Social security
- Federal unemployment taxes
How Much Do You Need to Pay?
If you pay your nanny $2,200 in 2020, you’ll also need to consider how much tax you need to pay. Your first step towards achieving this is to identify your nanny’s gross wage by multiplying the number of hours they work by their hourly wage. This figure alone will unlock your social security and medicare payments, which should be 15.3% of that gross figure, with 7.65% of that being either withheld from your employee or paid for them by you.
Understanding gross payment can also help you to settle on how much federal tax you should withhold or pay yourself. The amount you pay here will largely depend on the length of your pay periods and whether your payments exceed the $1,000+ plus federal threshold. Most parents find that using a verified ‘nanny calculator’ is the easiest way to settle on these amounts, and even deciding whether to pay this annually or quarterly.
Federal unemployment taxes (FUTA) depend on where you’re hiring, how much you pay, and when you pay it. As it stands, you must pay 6 or 5.4% on up to $7,000 of your nanny’s annual wage, but this amount doesn’t need to be paid until you already owe $500.
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Filling the Right Forms
You’ve likely had it up to here with forms at this stage, but filling out and filing the correct forms from the moment your nanny begins working with you is fundamental from a tax perspective. For one, you need to be keeping reliable records of any cash or cheque payments that you make to your nanny at any stage, as you’ll need these for form filling pretty much across the board.
You and your nanny will also need to fill out various forms at the beginning of this employment journey and around tax time to ensure you’re notifying all the right people and getting yourself on any necessary tax registers. These forms include:
Employer identification number - You can apply for this online and will use it whenever you file nanny taxes in future.
Form 940 - An annual form that reports your FUTA payments
Form W-2 and Form W-3 - Forms for social security payments
Schedule H form - Determines how much you’ll pay for your nanny taxes
From Your Nanny -
Form I-9 - It’s your responsibility to ensure your nanny is eligible for employment, and thus taxation, in the US. Do this by asking them to fill a Form 1-9, which you’ll then keep on-record for three years.
Form W-4 - A form W-4 is also necessary if your nanny would like you to withhold federal income taxes.
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What Happens If You Avoid Nanny Taxes?
Many individuals either don’t realize their need to pay nanny tax, or attempt to bypass the issue by paying in cash. Aside from putting you on the wrong side of the law and risking your residency, this is a terrible idea for a few different reasons. In fact, it could pose setbacks for your nanny and you alike, including:
- A lack of social security benefits for your nanny
- No Medicare eligibility
- No employer access to tax deductions (families paying nanny tax are eligible for childcare credit of up to $6,000)
With this in mind, a failure to pay nanny taxes upfront could end up costing you in everything from reputation to finances. So, tackling this issue sooner rather than later in your childcare journey is fundamental.
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Simplifying the Process
You wouldn’t be alone in feeling overwhelmed with this influx of information. You’ve just got your head around the sometimes complex US tax system, and an entirely new requirement appears in the works. The good news is that there are plenty of ways to simplify your nanny tax processes, and each of them could take a great deal of pressure off your shoulders.
As mentioned, nanny tax calculators can prove invaluable in this sense, as they give you a reliable indication of what you should be paying and when. This ensures you never fall behind or accrue late fees where federal taxes are concerned.
There’s also a wide range of services available to take care of this matter for you on either a full or tax only basis. Each could take a lot of the hard work and mystery out of the nanny taxes you face, as well as simplifying your filing processes.
Ultimately, you should find that nanny taxes aren’t half as difficult to wrap your head around as they can first seem. All it takes is knowledge, financial assistance in the right places, and a constant awareness that these are payments you definitely can’t avoid!