Nanny taxes: How to pay taxes for a household employee

Few choices are harder for parents than what to do about childcare. It’s an expensive decision. If one parent stays home, the family saves money in the short-term, but the non-working parent loses current wages and future Social Security benefits.

On the other hand, many jobs pay no more than what one would pay for full-time daycare, particularly with more than one child in the family.

I have two children, a three-year-old and a five-month-old. Putting them in daycare wasn’t a great option for us because my freelance work schedule varies throughout the year.

That left me with the choice between a babysitter to watch my kids in their home or one who would come to my house. I knew the first option would be cheaper. But for many reasons—some unexpected—I hired someone to care for my children at our house.

According to the IRS, I now had a “household employee,” which suggests mansions full of gardeners, chefs, personal assistants, and other luxuries way beyond my means.

But no matter. Whether you call the person who looks after your kids a babysitter, a nanny, or simply by their first name, your tax liabilities are unambiguous. In this guide we make it easy to understand how to pay nanny taxes.

Plenty of people pay their childcare providers in cash to avoid the tax issue. In the end I decided to play by the rules because of my husband’s stubborn sense of right and wrong, and because there were financial benefits for us as employers as well as for our nanny.

Here are the best reasons to pay the nanny tax:

• Your nanny builds Social Security credits and increases their future retirement benefits.
• They also work toward eligibility for premium-free Medicare hospital insurance.
• When your children get older and you no longer need full-time childcare, your nanny can receive unemployment benefits until they find a new job.
• You earn a tax deduction for a portion of your childcare costs.
• You don’t have to worry about getting audited later on and owing thousands of dollars in back taxes and fines.

Now that we’ve covered the “why” of paying nanny taxes, we’ll talk about the “how.”

The hardest part of this whole process is finding a person you like and trust with your children. So you can relax if you’ve already found a great sitter. Paperwork is just paperwork.

Here are the forms you and your nanny need to complete at the beginning of her employment.

Employee forms

Form I-9, Employment Eligibility Verification

Your nanny fills out the Form I-9 and you keep it on file for three years after you hired them or one year after they stop working for you. If you part ways after a year, you still need to hold on to their I-9 for another two years.

Form W-4, Employee’s Withholding Allowance Certificate

You aren’t required to withhold federal income taxes, but if your employee wants you to they have to complete Form W-4.

Employer forms

Employer Identification Number

This is what you’ll use to pay taxes associated with your household employee. You can apply for an EIN online and instantly download your “approval” letter.

State Unemployment Taxes

The rates and rules vary by state, so be sure to check with your local state for information. For Pennsylvania, where I live, I was able to register online using my EIN, but I had to wait for the paperwork with my assigned tax rate to show up in the mail.

Whether you pay your nanny every week or bi-weekly, you’ll have to calculate their gross and net wages on payday. A kind accountant friend of mine created a spreadsheet that keeps track of work hours and calculates taxes and gross and net income.

I send my nanny her paystub by email each week with an overview of the hours she worked, taxes withheld, and gross and net income.

1. Add up the hours your babysitter worked during the previous payroll period.
2. Multiply the number of hours by the hourly wage. For example, 40 hours times $15 equals $600. This number equals gross wages.
3. Calculate social security and Medicare taxes. You and your employee each pay 7.65% of gross wages (6.2% for Social Security and 1.45% for Medicare).
4. Subtract your employee’s share from her gross wages and record the amount you owe. For example, 7.65% of $600 is $45.90.
5. If your nanny asked you to withhold federal income taxes, you can use the income tax withholding tables that start on p. 46 of Publication 15 to figure out how much to take out of your nanny’s paycheck. The tables are arranged by length of pay period, marital status, and number of exemptions.
6. Calculate your state unemployment taxes if applicable. In my state there are different rates for employer and employee.
7. Calculate Federal Unemployment taxes (FUTA). Only the employer pays FUTA on up to $7,000 of an employee’s annual wages. The current rate is 6%, but you can receive a credit of up to 5.4% if you also pay state unemployment taxes.

Federal taxes must be paid online through The Electronic Federal Tax Payment System (EFTPS). Be sure to keep track of deadlines so you don’t get hit with late fees.

Social Security, Medicare, and federal income taxes should be paid monthly, with some exceptions.

The FUTA tax does not need to be paid until you owe more than $500. So if your total liability is less than that, you can pay it once a year; otherwise you’ll need to make at least one quarterly payment.

Either way, you need to fill out Form 940 annually to report your FUTA payment(s).

Doing payroll means dealing with the IRS on a regular basis. If that feels like too much, there are services that will do your household payroll for you. Two that you might want to check out are NannyChex and NannyPay.

NannyChex is an online service that has two levels of service: full service and tax only.

With full service all you have to do is go in and approve your payroll each pay period. They will handle everything else.

With tax-only you will do all the initial paperwork such as getting your EIN and state account information. They will do all the calculations as far as how much to withhold from your nanny’s check and how much you owe in taxes. They will create the forms you need to send in to the government and remind you when your taxes are due, but you have the responsibility of arranging payment and submitting the forms.

If you are comfortable with the tax-only service then definitely look into NannyPay. It’s a software you download to your computer, but it does everything that the NannyChex tax-only service does but costs much less.

As a wise writing professor of mine once said, “Don’t cheat on your taxes.” Paying nanny taxes can seem intimidating, but once the initial flurry of paperwork has passed you can more or less run on autopilot—especially if you pay your nanny the same amount each week.