Birth of a new child brings happiness and excitement but it also triggers responsibilities and tax consequences. There is plethora of new expenses you have to face and one of them is care services. If you work or are engaged otherwise, you may have to hire a nanny to take care of your child. This is a delicate situation, in your eyes all you do is temporarily and intermittently seek help but in the eyes of the IRS you become an employer.
How do you know if you have to pay taxes for your nanny?
There are some rules and as always there are exceptions. First of all, a clarification of who is considered a nanny. According to the IRS, a nanny is a household employee whose work activities (what and how) you control. Other examples of household employees include babysitters, caretakers, drivers, domestic workers, cleaning workers, housekeepers, maids, health aids, private nurses, and/or yard workers.
If you paid your nanny more than $1,800 in 2012, you are responsible to pay Social Security and Medicate taxes on anything over that amount. Than requires you to keep track on all wages paid out. Additionally, if you paid more than $1,000 in any given quarter, you have to pay the federal unemployment tax. Exceptions to paying taxes arise when you pay for nanny services to you spouse, parent, and your child under age of 21, or an individual 18 or younger at any time during 2012. You are relived from paying the unemployment taxes for the same groups of people except the individuals 18 years or younger whom you paid over $1,000 in any quarter of 2012.
How to pay nanny taxes
The current tax system does not make it easy on setting up necessary paperwork to pay taxes for household employees. But like all things in life, the first time is often complicated until we gain confidence and experience in what we do.
Nanny taxes or any Household Employment Taxes can be paid at the time you file your individual or business tax returns. For individual taxpayers, you have to attach Schedule H to your Form 1040 and file it at your filing deadline. Schedule H will take you step by step to calculate Social Security, Medicare, and Unemployment taxes.
Keep in mind that there are few other documents you need to complete the process. They include:
- Form SS-4 Employer Identification Number (EIN) – you can also request the number electronically from the IRS.
- Form I-9 for Employment Eligibility Verification.
- Form W-2 Wage and Tax Statement and give it to your employee for his/her tax reporting.
For more details, consult with Publication 926, which provides a complete list of requirements and examples on how to proceed under different circumstances.
What are the benefits of paying nanny taxes?
Setting up all the paperwork related to hiring a nanny and paying taxes has some benefits too. The first one is that you can sleep sound and worry-free because you follow the law. The employee that you may have to let go for whatever reason can file for unemployment benefits but if you never paid corresponding taxes, the IRS may investigate the reasons behind it. That on the other hand can trigger penalties and fees. Other benefits come in a form of tax credit such as Child and Dependent Care Tax Credit or access to pretax flexible spending accounts offered through some employers. Finally, it is the right thing to do because without reporting and paying taxes your employee will not be able to count those years and amount made towards his/her future social security benefits.
- Publication 926, Household Employer’s Tax Guide – very extensive guide and step by step process of what forms are necessary; sample scenarios with numbers are presented.
- Schedule H
- Form I-9
- Form SS-4
- Form W-2