Caring for a child is one of the most important and rewarding jobs out there. Hiring a nanny to help you raise your child should be a decision made thoughtfully, with careful consideration to what will best meet your family’s needs.
But when it comes to nanny search and hiring, the most common thing families get wrong is not recognizing a potential caregiver as an employee. Hiring a nanny is different from dropping off your child at a daycare center. Because it’s an employer/employee relationship, you have certain responsibilities that come with that relationship — one of them being the nanny tax.
Many families are unaware of this requirement and therefore don’t understand what it means or why it matters. We hear from parents who want to avoid paying taxes because they think it’s too complicated or too expensive — but in reality, the costs associated with avoiding your tax burdens are much more prohibitive.
Below, we’ve included some FAQ regarding the nanny tax so you can be sure you’re in compliance anytime you’re paying nanny — whether paying through apps or paying with cash — and staying on the right side of the tax laws.
What Is the Nanny Tax?
The most important thing to remember is that if you pay a household employee $2,400 or more in 2022, you will be required to pay federal employment taxes. These taxes include the following:
- Payroll taxes withheld from the nanny’s paycheck, including Social Security, Medicare, and federal and state income taxes
- Employer-paid Social Security, Medicare, and federal and state unemployment insurance
- Applicable income taxes according to your state rules
IRS Publication 926 provides more details about the nanny tax to help you determine whether you have a household employee and, if you do, how to properly pay taxes.
What Is a Household Employee?
The IRS states that a household worker is an employee if you control both what work is done as well as how it is done. That includes your nanny, someone whose schedule you dictate and who follows your rules while performing their work.
Whether you employ your nanny for a few hours a week or full-time, they are still considered to be a household employee if you pay them $2,400 or more per calendar year. This is also true whether you hire a nanny on your own or do so through an app like the Happiest Nanny app.
Resist the urge to pay your nanny under the table or to misclassify your nanny as an independent contractor who receives a 1099 form. Doing so could result in tax-evasion charges, and that’s one headache nobody wants to take on.
What About Paying Through Apps?
Paying your nanny through an online app like Venmo or PayPal seems like a convenient, modern way to get money to your caregiver. But you need to be aware that these apps could get you in trouble with the government for not reporting payroll taxes for your nanny.
Paying through apps like Venmo carries its own set of rules — a Venmo tax, if you will. Accounting Today reports that under the American Rescue Plan Act, passed in March 2021, payments for services like childcare through third-party apps like Venmo, PayPal, and CashApp will be reported to the IRS if those transactions total $600 or more in a year.
How Do I Pay the Nanny Tax?
When you use the Happiest Nanny app, we handle all the back-end requirements for payroll processing and tax withholding. This makes it easy to make sure you’ve got your nanny tax situation handled.
To give you an idea of what’s involved with handling nanny taxes, here are some basic guidelines on what’s required to be in compliance:
- Federal and state tax ID numbers. Get the federal tax ID from the IRS, and use this number to get your state tax ID.
- Correct payroll processing. For each pay period, you need to calculate your nanny’s gross pay and the associated tax withholdings and employer taxes.
- Year-round tax returns. Depending on the rules in your state, you will need to submit quarterly or even monthly filings as well as estimated tax payments.
- Year-end tax forms. This includes a W-2 for your nanny by the end of January, required Social Security Administration forms (Form W-3 and Form W-2, Copy A), Schedule H, and possibly an Annual Reconciliation form.
Why Should I Pay the Nanny Tax?
You may think that by paying through apps or avoiding tax withholding, you're doing your nanny a favor. She'll have more take-home pay — you can pay her less and she won't complain, right?
But if the IRS catches on to what you're doing, they could assess penalties and interest on both of you — maybe even back payments on her part. You could also owe jail time.
Beyond the inherent risks of avoiding your tax responsibilities when paying your nanny, it’s important to understand the benefits of proper tax withholding for your nanny, such as:
- Social Security and Medicare coverage upon retirement for your nanny
- Unemployment benefits if you ever need to lay off your nanny due to no fault of her own
- An employment record, required for obtaining auto and home loans
- Peace of mind in knowing that their needs are being met
When it comes down to it, properly paying nanny is a win-win for both parties. You can rest assured that your books are in order if for any reason you ever get audited by the IRS.
Meanwhile, your nanny is treated with the respect and dignity she deserves as a valued member of not only your family, but your “team,” if you will. When she feels like a priceless contributor within your home, she’ll be more likely to stick around for the long haul.
With the Happiest Nanny app, all of your tax needs are handled for you, from the initial paperwork to tax filing. Make sure you’re in compliance and making the best choice for your family by downloading our app today.