You've hired a nanny...now what?

So you’ve decided to hire a nanny; you’ve made an offer and it’s been accepted.  Now what?  Chances are that you’ll now need to become familiar with the term nanny tax.  According to IRS Publication 926, once an employee is paid $1800 or more in compensation from one employer, those wages are subject to Social Security and Medicare tax withholding.  Employing someone in your home is a genuine business and is recognized as one by the federal, state and local governments.

Usually one of the first questions to come up is:  Does the nanny file her own taxes – or do I?   The answer to that is household employers are ONLY required to withhold Social Security and Medicare taxes for a nanny.  The nanny is responsible for filing his/her own Federal and State income taxes.   However, although employers are not required to withhold income taxes, when clients ask us, we usually recommend doing so.  This way, nannies are not left with a big tax bill to pay when they file their tax return. 

Should you decide to withhold for your nanny, as the employer, you will make the tax payments to the IRS and State on your employee’s behalf.  If you have negotiated a Gross pay with your employee, withholding for them does not affect your employer tax liabilities.  These are calculated on top of Gross earnings and employee taxes are withheld from the Gross pay. 

In either scenario, as the employer, you should have an agreement in place indicating that you will or will not be withholding Federal and State taxes.  Again, if the agreement is to not withhold, your nanny would be responsible for making arrangements with her State and IRS to pay those taxes. 

There are also key recommendations you need to do once you hire an employee.  Specifically:

·         Obtain an employer identification number

·         Have the employee(s) complete form W-4 if employer will be withholding income taxes

·         Obtain form I-9 for employee eligibility verification

·         Apply for your state unemployment identification and state withholding number

·         Apply for your state’s New Hire report

·         Obtain Form 1040 ES for estimated tax payments

·         Check  workers’ compensation insurance requirements for your state

·         Establish a regular pay period schedule and inform employee

·         Keep records in a safe place for at least 5 years or longer, depending on your state’s requirements 

To many people, this list seems overwhelming, time-consuming and frightening.  This is why people in your situation tend to turn to companies who specialize in managing household employment matters and can do this for you.   GTM Payroll Services is one of those companies and for an average of around $60 per month, the headaches would be handled for you and you would be left with the peace of mind of knowing that you are doing what is required of you as a legit employer.

So you’ve done your research and you know your responsibilities but then, you come across a situation where your nanny wants to be paid “off the books”.  How do you handle that?  It’s important to explain to your employee the many reasons why it’s important to be paid professionally and legally.  Being an employee offers:

·         Unemployment insurance coverage – in the case that he/she is ever unemployed, he/she may be eligible to apply for unemployment insurance

·         Social Security tax credit – the tax that he/she pays into this will count toward retirement income

·         Workers’ Compensation/Disability coverage - depending on the state requirements, he/she may be eligible for reimbursement of lost wages if he/she gets hurt on or off the job

·         Employment history – helps him/her in the case of applying for credit or a loan for a car or a home

Okay, so now you’re an expert in payroll and tax responsibilities.  Now, what about workers’ compensation?  Many states require this coverage for full or part time employees.  Having a policy will cover necessary medical bills and a portion of your employee’s wages should he/she become injured on the job.  You shouldn’t assume that you’re covered for this under a Homeowners’ policy.   Many times, a separate policy needs to be set up.

The bottom line is that there are a lot of responsibilities that come with hiring an employee to work in your home.  You are now considered a business and your employee is a professional.  Once you understand your roles and what comes along with them, it’s not so overwhelming.