Still so confused over taxes- help!
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Anonymous
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We've had a nanny for a few years. In addition to her salary and health insurance, we pay both her portion and our portion of taxes. In other words, in addition to her salary, every quarter we pay a few thousand dollars more to cover her taxes (we do this all through a nanny tax service).
My question is, what is the most common practice? I know a few families who say that they just cover what is required (FICA) and then at the end of the year, their nanny needs to pay taxes out of what she has made. To me, this seems totally unfair to the employee but it seems common. Does anyone else do this? We pay our nanny about $18.50/hour before taxes but when you factor in her taxes, we end up paying close to $60k a year, which seems like a lot. We are about to make a change (nanny is moving away) so I want to understand what is most common as we negotiate with someone new. Thanks. |
Anonymous
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Everyone pays their own taxes out of what they make. If you make $1000, you pay federal, state, and FICA taxes. Your employer pays an additional amount of FICA, plus unemployment insurance and probably worker's comp.
Are you saying that you pay her share of FICA, her federal income tax, and her state income tax IN ADDITION to her base salary? And that a nanny tax service set all of this up for you? It is actually not legal for you to pay her share of her taxes; that becomes additional compensation, and she owes taxes on that as well. Some people do offer "net" pay, which means that she takes home $18.50/hr without ever owing any taxes on that amount, but that means her actual salary is considerably higher than that. Did you mean to offer a tax-free income to your nanny? |
Anonymous
so the fact that an employee must pay taxes on what she makes seems totally unfair to you? 
as the other poster noted, I am not sure how this things works. if you pay her a salary, and then you pay her share of the taxes (in addition to your share), that amount you pay is extra compensation and should be taxable too. are you paying a gross salary and withholding her share of taxes? anyway, if you pay $18.50 NET in DC and also her share of taxes, you are really paying a lot |
nannydebsays
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OP, if you are paying your nanny $1000 a week NET, then you are also paying her share of the taxes on that 1K, you are actually paying her about $1200/week. You are, frankly, screwing yourself over.
Since you will be hiring a new nanny, during the vetting process be sure to explain that you will be withholding all applicable taxes from her weekly paycheck, and then submitting them to the government via whatever tax service you use. You can actually google "nanny tax calculator", and print out some examples of how much a nanny might take home based on X, Y, or Z hourly wage, and then show those papers to nannies when you have the following discussion with them: You: "Nanny, we are offering an AVERAGE hourly rate of $18.50 GROSS for 50 hours of work per week. That means you will earn $925 GROSS per week. We will hire a payroll company to manage tax withholdings. You will fill out a W4 form before you start working for us, and then we can give you an exact breakdown of the taxes that will be withheld from your check, and your exact NET weekly pay. As an estimate, your take home pay or NET pay per week will be around $740." Then in the contract you break down the AVERAGE hourly rate into straight time and OT ($16.82 and $25.22) to be completely legal and offer full disclosure. |
Anonymous
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Wow you were paying ALL of your nanny's taxes? She definitely had it made.. Surprised she's leaving.
FYI, with your next nanny please try to NOT screw yourself by throwing your money out the window. |
Anonymous
| I may have explained this wrong. For example, if she makes roughly $19/hr, twice a month we are paying her about 1700 per pay period and she takes home about 1300. That extra 400 goes into a holding account and the tax service then uses that to pay taxes each quarter. In addition to that, every quarter we also pay an additional thousand or so. My understanding is that this is essentially the other portion. However, we have friends who don't cover this. So I'm wondering what others do. |
Anonymous
| And yes, when we negotiated with her, we negotiated her net pay (it has changed over the years so I'm not sure what it is anymore). This was the result of a bunch of complicating factors, like leaving a nanny share and having to make up the difference, and she does so much for us we haven't minded. But now that we are starting with someone new and our needs have changed, we want to be smart. |
Anonymous
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OP - it does not sound that you are paying her share of taxes. And it make sense you are paying some of the taxes. you are legally liable for your share of FICA and unemployment.
Since you asked - I pay my nanny's share of FICA. I give her a bonus in the end of the year which covers about 50% of her income tax. |
Anonymous
I don't think you can say you pay your nanny's share of the taxes. you can say that you give her a bonus in an amount that corresponds to 50% of her income tax. this does not mean that you are "covering" 50% of you nanny taxes. when you give her a bonus, she owes taxes on that money too, like any other worker who gets an end of the year bonus (unless you pay the bonus under the table, which is illegal and means that you and your nanny are braking the law) |
Anonymous
| Based on your second description it doesn't sound like you are paying your nanny's taxes. It just sounds like you are withholding a portion of her paycheck and submitting it to the IRS on her behalf. That is totally normal. |
Anonymous
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I would first talk to your tax service and clarify exactly what is going on, since it sounds like you may or may not have a handle on that--not a dig, it is really confusing.
As an employer, you need to pay the employer portion of FICA plus unemployment tax (both state, which is usually paid quarterly, and federal, which is also known as FUTA and can be paid annually). You are also obligated to EITHER withhold the employee's portion of FICA or, if you fail to do that, you must pay her portion of that as well. Either way, you need to present her with a W-2 at the end of the year showing you what you withheld and/or paid so she can file her taxes. As a household employer, you are not obligated to withhold her income tax. She can file quarterly based on her expected earnings, or she can file annually like most people do. This may seem unfair in that it can be complicated, and it may result in the nanny having to pay taxes as opposed to getting a refund, but in that sense, she's had access to her money all year rather than (in a sense) loaning it to the government for a period of several months. I have an accountant friend who maintains that if you regularly get a big refund, you're probably having too much withheld, so that's a different perspective. We withhold our nanny's portion of FICA, pay our FICA portion annually (as opposed to quarterly), pay FUTA annually, and make a quarterly payment to our state's unemployment tax. We don't withhold income tax. |
Anonymous
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OP, take a look at your own pay stub.
Minus any withholdings such as health insurance, retirement and other benefits, your nanny's should be set up the same way. You have your gross pay. From that, you are responsible for 1/2 of FICA, as well as 100% of your federal & state income taxes. Your employer pays, out of their own bank account, the other half of your FICA, as well as unemployment insurance. There is nothing special about "nanny taxes". They are simply regular employment taxes. |
Anonymous
| It sounds like you're simply withholding her income taxes, not paying the on top of her rate, which is completely normal. Not legally required, but normal. All you are legally responsible for is withholding her portion of FICA and paying yours. Some families do only this minimum, and you're right, it sucks for the nanny, especially if she doesn't understand what is going on. She then has a big tax bill at the end of the year that may be a huge surprise. |
Anonymous
| OP back. Thanks all. I just realized the confusion was that financial tracking software I have had duplicated a whole bunch of transactions which made it seem like we were spending a lot more than we were annually. We actually do just withhold her income taxes |
Anonymous
| Nanny taxes are so daunting to me! I wouldn't trust myself to try and do it on my own. GTM handles the taxes for my nanny and they were great in explaining what I'm responsible for. You may want to try a service like them to take it off your plate - less to worry about. |