Category: Advice

A lesser known perk which can help save money in taxes for both a household employer and nanny is to provide or reimburse for health insurance.

Given the same amount of money paid to a nanny, allocating a portion toward health costs (which your nanny would be paying anyway), will result in these tax saving benefits, saving you both money!

• lower Medicare and Social Security taxes owed by nanny
• lower income taxes owed by the nanny
• lower Medicare and Social Security taxes owed by employer
• lower Unemployment taxes owed by employer

Household employers are not required to pay for a nanny’s health insurance. However, you should consider this perk to benefit you both.

There are 2 ways to offer this benefit:

Option 1: Reimbursing for a nanny purchased Health Insurance plan

One option where the nanny purchases their own health insurance and is reimbursed for some or all expenses by you.

With QSEHRA (Qualified Small Employer Health Reimbursement Arrangement), the tax-exempt limit is $6,150 annually for 2024 for individual coverage and $12,450 for a family plan, prorated for partial year employment.

This is an appealing option for a few reasons. If she chooses her plan, she can pick the one that best matches her needs. Additionally, after her employment with you ends, she can continue with the same health insurance and not have to change plans.

With reimbursement method, ask your nanny for initial proof and monthly statements. You do not need to submit these anywhere, but retain these in case of an audit.

Option 2: Purchasing Health insurance

An alternate strategy is to purchase health insurance as an employer and provide it as an option to your employees.

In this scenario, purchase the insurance via SHOP (Small Business Health Options Program) to become eligible for tax credits.

Setting up

When offering this benefit, detail it in writing, such as in an addition to her nanny contract.

To set up in the Paycheck Nanny iOS app, use the ‘Health Insurance’ field on the Employee Setup to pre-populate this amount on the Time Card when ‘Extra pay’ is chosen.

Yearly tasks

When creating a W-2 for your nanny each year by January 31, you will enter the available benefits into Box 12 with code FF. This amount is not taxable, but is provided for informational purposes.

The limits for reimbursement have grown each year. So review your benefit amount offered each calendar year if you wish to increase the benefits.

5 Reasons to pay your nanny over the table by Paycheck Nanny

What’s involved in not paying under the table?

If you are not sure where to start, or you have been shocked at the full service payroll prices, let the Paycheck Nanny App help.  Find it for iOS on the App Store or get it for Android on Google Play.

When hiring a nanny and discussing salary, one often overlooked discussion is that of vacation and holiday expectations.

Vacation and holiday benefit considerations

• Will you offer a certain amount of paid time off or limit unpaid time off?
• Is the nanny able to choose all the dates or are there any fixed days, such as during your own vacation plans or holidays? The most commonly paid holidays are New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
• Will this time be lumped together to use for either sick, holiday or vacation? Or will they each be considered separately?
• What sort of advanced notice do you require for time off?
• Can the time be used immediately or only after some number of days worked (30 days, 60 days, etc)?
• What happens to unused days? Are they rolled over into next year, forfeited, or paid out?

What is required

Federal law does not require household employers to offer paid vacation time or paid holidays for a nanny. Part-time or summer only nannies would likely not expect these perks. On the other hand, full-time year round nannies, especially experienced ones, are likely to look for or expect this benefit.

Even if a nanny does not specifically inquire about any holiday or vacation benefits, offering them can promote a positive nanny-employer relationship. This can help keep a great nanny happy and show her how much you appreciate her own well-being.

Expectation setting

No matter what you decide, you should discuss expectations up front when you discuss salary with your nanny and review yearly. In the nanny-employer relationship, upfront and frequent communication is critical in avoiding resentment and issues later on.

How to track

When using the Paycheck Nanny app for Android devices or the app for iOS devices, vacation or holiday time to be paid should be specified via the Time Card for the corresponding pay period.

When you hire a nanny, you may be surprised at the complexity involved to simply pay her.  There are several different options to handle payroll.

Let’s look at each of the nanny payroll alternatives in a little more detail.

1. Pay under the table.  This is bad for the nanny and bad for you as the employer.  If you are paying $2,200 or more to your nanny in 2020, it considered tax evasion to go this route.  For the nanny, she loses out on accruing Social Security benefits, unemployment benefits, a verifiable record of employment to help build her credit history, and worker’s compensation benefits should she get injured on the job.  Luckily, there are tax breaks available to you as a household employer which can cover much of the extra cost required to pay legally.
2. Use a full service payroll provider.  Using a company such as Care.com HomePay by Breedlove will take care the initial registration as a household employer, handle all payroll for you, and file quarterly and yearly reports on your behalf.  However, there is a steep price for this, and you may pay over $1,000 for a year of such a service.
3. Do all the legwork yourself.   You can find out the federal, state and local requirements of what and when to register and pay for.  Then on a weekly basis calculate the required withholdings, give your nanny a pay stub, retain required records, and write a check to your nanny.  This is the cheapest of the legal options, but also the most time-consuming and tedious.  Use this handy checklist to see what is involved.
4. Paycheck Nanny.  Paycheck Nanny is a mobile app for Android phones and tablets or your iPhone and iPad that takes care of the most tedious and regularly recurring parts of nanny payroll, and guides you through the rest.  With a $5 a month price tag and even a free trial, you can’t go wrong to give it a try.  Download it from the Google Play Store or the Apple App Store.

The ‘nanny tax’ is a collection of taxes you are required by law to pay if you meet the criteria. See below to learn who each of these items apply to, and why you and your nanny should care.

Social Security and Medicare (aka FICA)

Required if you pay your nanny cash wages of $2,400 or more in 2022 (up from $2,300 in 2021). Some exceptions apply if your nanny is your spouse, your child under the age of 21, your parent, or under the age of 18; in those cases, see the Federal Household Employer Guide.

Federal Unemployment Tax (FUTA)

Required if you pay cash wages of $1,000 or more in any calendar quarter of 2022 or 2021 to your nanny. Exceptions are if your nanny is your spouse, your child under the age of 21, or your parent. Unlike Social Security and Medicare, FUTA is entirely employer paid and is not withheld from your nanny’s paycheck.

(State Dependent) State Unemployment Tax (SUTA)

Some states also impose a state unemployment insurance tax which can be in addition to FUTA or instead of it.  This is state dependent and the rate can vary by individual, depending on your household employment history.

(State Dependent) Worker’s Compensation Insurance

Some states require household employers to carry Workers’ Compensation Insurance. Even if it is not required in your state, it is still recommended to protect yourself in case your nanny injures herself while on the job. This needs to be obtained from an insurance agency. Talk to one in your area for details around local requirements, cost, and how to purchase. Your homeowner’s insurance policy may provide coverage in some scenarios, so this may be a good place to start.

(Optional) Withholding Federal and State Income Tax

Withholding federal and/or state income tax is not required of household employers. But if your employee asks you to withhold it, you can.

Due to the additional overhead on the employer to handle this case, some nanny employers choose to instead advise their nanny to estimate their tax burden for the year using a tax estimator to plan accordingly.

For federal income taxes, this can be done via the IRS Withholding Calculator or IRS Publication 505.  If your nanny expects to make enough to owe income tax, she can pay estimated taxes on a Quarterly basis via IRS Form 1040ES.

Benefits of going through all this overhead

You may be wondering why not just pay under the table? Besides being illegal, there are benefits to both employer and employee to paying legally. For the Employer, you can take advantage of tax-deferred Dependent Day Care plans offered by your employer or you may be eligible for the Child and Dependent Care Tax Credit, as well as not having to fear an IRS audit and worry about legal repercussions. For your nanny, she will be accruing Social Security, be eligible to collect unemployment, and have record of job history to build up credit.

References

See the complete Federal Household Employers Guide at https://www.irs.gov/publications/p926/ar02.html

Download Paycheck Nanny from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

One question we often hear is whether a nanny can be classified as an Independent Contractor.  The appeal of this idea is that it would allow you as an employer to skip paying FICA taxes (Medicare and Social Security).  However, the nanny would instead be the one to pay those taxes, which would be filed with Form 1099 when she pays her yearly income taxes.

However, federal law is clear that a nanny who works in your home should not be classified as an independent contractor.

So rather than classifying your nanny as an Independent Contractor, the correct thing to do is to treat yourself as a Household Employer by issuing your nanny Form W-2 and sharing the FICA tax burden with your nanny.

Now this classification distinction only matters if you will pay your nanny or babysitter $2,100 or more in 2018, up from $2,000 in 2017.  If under this amount, then FICA taxes will not apply.

For a checklist of how to pay your nanny legally, see here.  This information is also included in the Paycheck Nanny Android app and the Paycheck Nanny iOS app.

For more information about classification of a household workers, see the IRS website.  An excerpt from Pub 926 is provided below.

Do You Have a Household Employee?

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it doesn’t matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also doesn’t matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.

Example.

You pay Betty Shore to babysit your child and do light housework 4 days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.

Workers who aren’t your employees.   If only the worker can control how the work is done, the worker isn’t your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.  A worker who performs child care services for you in his or her home generally isn’t your employee.  If an agency provides the worker and controls what work is done and how it is done, the worker isn’t your employee.

In 2024, you can pay a nanny or babysitter up to $2,700 in a calendar year without worrying about taxes.  This is up from $2,600 in 2023.

If you pay more than that, you may be considered a household employer. If so, then you are responsible for FICA (Social Security and Medicare Tax) and Unemployment Insurance taxes.  There are exceptions to this if the caregiver is your spouse, parent, or child under the age of 21.

This calculator will help to quickly estimate your nanny’s income to determine if you would be over the $2,700 amount in a year.

Download Paycheck Nanny from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

When you have school-aged children and the dog days of summer are winding down, back to school season also brings a new routine.  This may mean a babysitter or nanny for before or after school care, or both, during the school year.

If you are a household employer and pay $2,700 or more in 2024 to a nanny or babysitter in a calendar year, then you are responsible for FICA and Unemployment Insurance taxes.

Here is a quick calculator to help determine if you will owe these taxes.  Notice the $2,700 minimum is per calendar year and not school year.  So if you only use your nanny for the fall, you may not have to worry about these taxes. But if you also paid your babysitter earlier this year, this may put you over the lower threshold.

Don’t let taxes get you in the doghouse!

Download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

When your kids are out of school for the summer, getting a nanny can be a convenient option. There is no stress of getting kids out the door in the morning or dealing with drop-off or pick-ups. And if you are lucky, your nanny may even be able help out with errands or get the kids involved to help with dinner prep.

There are also many college students looking for summertime employment, so it is often a win-win arrangement.

If you have multiple children, a nanny could even end up being cheaper than a day care center or camps.

Finding a nanny can be a challenge, however, especially if you are new to an area. Some great tips on where to find a babysitter and what to look for are found in this guide How Do I Find (and Keep) a Great Babysitter in My New Town?

How much should I pay a Summer Nanny?

The hourly rate for a nanny in the US is typically between $14 and $20 per hour. And some areas can average even higher – I’m looking at you, California.  The factors that most affect the actual rate are:

1.  Location.  The going rate in an area will have the biggest influence on pay rate.  To get an idea of going rates in your area, see here.
2. Number of children.  The more children will generally yield a higher pay rate.
3. Prior experience.  Nannies with previous nanny experience will command a higher rate than a nanny with no prior experience.

Also don’t forget about overtime.  Labor laws require that you pay at least 1.5 times regular pay rate for any time beyond 40 hours a week.  Paying your babysitter hourly rather than salary will help ensure your babysitter is being properly compensated for for working overtime.

Total Cost of a Nanny

If you are weighing your options as to whether to get a nanny for the summer or enroll your children in a day care or summer camp, comparing the total cost can be useful.  The total cost of a nanny is more than just the hourly rate, however.  Don’t forget to factor in food, activities, taxes and other overhead when comparing costs.

For example, say you were paying $15/hr for 30 hours a week for 10 weeks.  You could do the simple math to estimate $4,500.  However, the other hidden costs in the example below add $1,300 on top of that.

Try entering in the cost and hours for your situation.  How does the total cost compare to your other summertime options?

Wait, do I really need to pay Taxes for my Summer Nanny?

Most likely.  It actually depends on how much you will pay your nanny over the entirety of the year.  If you pay more than $2,400 gross during the year to your nanny, it is considered tax evasion if you do not pay the appropriate ‘nanny tax’.

The good news is that some of this cost can be offset by tax breaks.  Your employer may provide a Flexible Spending Account for dependent care which allows you allocate pre-taxed dollars to pay for child care.  Or, you may be eligible for the Child and Dependent Care Tax Credit.  Those tax breaks could be used in the other situations like a day care center or camps.  One case it could not be used in, however, is if you pay your nanny under the table.

Or download Paycheck Nanny from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

Hourly or Salary – Which is better?

The short answer is hourly.  Note that you can set the the hourly pay rate so it still works like a salary, but we will get to that in a bit.

Why pay hourly?

1. The legal aspect: Paying hourly is critical to properly calculating overtime pay.  By federal law (Fair Labor Standards Act), your nanny must be paid overtime, at a rate of at least 1.5 times her regular rate, for any hours worked over 40 in a 7 day work week.  One exception is for live-in nannies – although some states do have additional laws making overtime pay required for live-in nannies as well.
2. The nanny relationship aspect: If you agree with your nanny to a certain fixed weekly rate, this usually assumes some certain number of hours worked per week.  But what happens when you need your nanny for extra hours some weeks?  Many salaried nannies report that they frequently end up working more than the originally planned hours, and then feel taken advantage of when they still get the same fixed weekly rate.

If you don’t consider these scenarios up-front, it can lead to some messy situations.

Guaranteed pay option

One optional variation is to pay hourly but at the same time guarantee your nanny that she will be paid for a certain number of hours per week, regardless of whether she is scheduled for the full number of hours.  The overtime rate of 1.5 times the regular rate would still apply for time over 40 hours.

This perk is very appealing to potential nannies, so can help you to get a higher quality candidate.

How to calculate hourly pay from salary

If you do want to think in terms of weekly fixed salary, you can do some calculations to convert this to an hourly rate, and still keep yourself legal from an overtime perspective.

Plug in the hours and weekly salary in the calculator below to figure out the effective pay rate and overtime rate for your situation.

As an example, say you and your nanny agree to a gross salary of $750 for a 55 hour work week. The standard wage for the first 40 hours would be $12 per hour and the remaining 15 hours would be at $18 (1.5 x $12) – this would give a total weekly salary of $750.

If using the Paycheck Nanny App for Android, you would set your nanny’s hourly rate to $12 and then use the Auto-Fill capability to populate her paycheck for 55 hours every week.  In the Paycheck Nanny App for iOS, just add standard hours and click on all working days.

This mimics salary and automatically calculates the overtime for you – keeping you legal.