If you hire a nanny to help you care for your children at home, you may experience additional tax responsibilities. In some cases, nannies are considered household employees, like housekeepers or fulltime gardeners.
What is a Household Employee?
Household employees can include maids, drivers, domestic workers, babysitters, cooks, health aids, and any other person who works at your residence.
The IRS considers you an employer if you control the nature of their work and how they perform it. It does not matter whether they work full time or part-time hours or how frequently they are paid (weekly, biweekly, monthly).
People who work as independent contractors and provide a service on their schedule are not household employees. Typically, they serve the general public, and provide their own tools and supplies.
When is a Nanny a Household Employee?
If you hire a nanny and assert control of what work is done and exactly how the work is performed, the IRS considers the nanny an employee.
For example, your nanny shows up every day at 9 am to watch your children. You instruct the nanny on what activities your child is to complete for the day. The nanny must have the children complete your puzzle for an hour, play outside for half an hour, make lunch and snacks for the children at specific times, and use the bicycles in your garage for a 2 pm ride. In this case, the nanny is your employee.
Suppose the nanny shows up as needed and not given specific instructions on what to do with the children or how to do it. In that case, they may not be considered employees. If the nanny uses the same activities and equipment with other children in other households, it is likely an independent contractor. Typically, in-home child care providers are independent contractors.
Are Grandparents or Siblings Considered Household Employees?
Unless your child already provides professional household services, they probably will not be considered an employee under age 21.
Older siblings and grandparents are household employees if they:
- Care for a child under the age 18 or mentally or physically disabled over age 18; and
- You are divorced and not remarried, your spouse died, or your spouse is disabled and unable to care for the child
On the other hand, their wages are typically not subject to Medicare and Social Security taxes.
Household Employee Taxes
The IRS does not require that you withhold Social Security and Medicare taxes. However, if your employee requests it, you must withhold the taxes. Consequently, the employee will need to complete a W-4 form.
If you withhold taxes, you pay them with your taxes on April 15.
If you do not withhold their FICA taxes, the IRS expects you to pay the full 15.4% on April 15.
If your nanny earns more than $1,000 per quarter, the IRS requires you to pay the unemployment tax.
Fortunately, all of these taxes may also provide a tax credit.
Nanny-Related Tax Credits
If you employ a nanny for child care, you may also qualify for the Child Care Tax Credit. For one child, it’s worth up to 35% of $3,000 in qualifying expenses. For two or more children, up to 35% of $6,000.
If you receive an employer-sponsored Flexible Spending Account benefit, you might be eligible to use it for dependent care.
FSA permits savings up to $5,000 of pre-tax funds for childcare expenses. However, if you opt to use the FSA, it would reduce the Child Care Tax Credit amount.
What Forms Must I Fill Out to Employ a Nanny?
Ordinarily, you will need to fill out a few forms when hiring a nanny.
- I-9: certifies that someone is eligible to work in the US legally
- W-4: employee withholdings statement
- Schedule H: discloses how much Medicare, Social Security, unemployment tax, and income tax you withheld from your nanny’s wages. You fill this form out for your tax return.
- W-2: You issue this to your nanny in January or February of the following year.
In general, if you hire a nanny to work in your house, chances are the IRS will consider them as a household employee. Be prepared to tackle tax forms.
When hiring domestic help, it can become complicated quickly. It is wise to consult with a tax professional for sound advice. Look for CPAs or Enrolled Agents in your area who can review your situation and provide guidance. You can also contact the IRS hotline for general information.