For many families with childcare needs, finding a quality nanny is a top priority. But it’s also incredibly personal; no two family’s care needs are alike. What families don’t realize however, is once they hire their caregivers, they become household employers and with that comes certain responsibilities. This is because the nanny is now the family’s employee and certain tax and payroll laws must be followed. If the thought of navigating household employer tax code, or “nanny taxes,” seems complicated, there’s good news: it doesn’t have to be.
To help simplify things, here are four ways you can avoid making common household employment tax mistakes.
1. Don’t forget about overtime. According to the Fair Labor Standards Act and the New York Domestic Worker Bill of Rights, a nanny must be paid overtime (time-and-a-half) for all hours she works over 40 in a 7-day workweek. The only exception is a live-in nanny, who is not entitled to overtime until she works 44 hours in a week.
2. Make sure your nanny gets a W-2. Nannies are considered household employees and need a W-2 to properly fill out their personal income tax returns. Many families mistakenly think their nanny is an independent contractor and give them Form 1099 instead. While seemingly well intentioned, this is considered tax evasion by the IRS, increases the nanny’s tax burden and restricts her professional benefits which include Social Security, unemployment, disability and Medicare.
3. Pay your nanny through your personal bank account. Some entrepreneurs think they can pay their nanny through their company’s payroll, but generally this is illegal. The reason is the IRS says a nanny is not a direct contributor to the success of a company, so including her payroll as a business expense is an illegal tax deduction. Instead, the nanny is a direct contributor to the family so she should be paid through a personal bank account and reported through the household employment (or nanny tax) process. Plus, by putting your nanny “on the books,” it gives her reassurance that you view her as a working professional providing a high-quality service.
4. Remember to pay for trial periods. It’s common for families to start a nanny on a trial period to see if she is a good fit. It’s a great first step to make sure the working relationship is a positive one. But families should also remember that the nanny must be paid during the trial period and they are responsible for reporting her wages.
Stephanie Breedlove is the VP of Care.com HomePay, where she helps families to simplify and understand their responsibilities as employers of caregivers or household workers.