When you hire a nanny, there are certain legal and tax obligations that come along with it. Understanding these obligations will keep you complaint with tax and labor laws.
Verifying the Nanny’s Eligibility to Accept Employment
As a household employer, it’s your responsibility to confirm that your nanny is legally authorized to work in the United States. You must keep completed form I-9 from the Department of Homeland Security of file to prove your employer is legally able to accept work.
Report the New Hire
As a nanny employer, you are also charged with the responsibility of notifying the appropriate state agency of your new hire. Contact your state attorney general’s office to determine which office oversees new hire reporting.
Determine If Your State Requires Workers’ Compensation
Depending on your state, you may or may not be required to obtain a workers’ compensation policy. Your insurance agent will be able to inform you as to if you need one and talk to you about the benefits of having one even if your states require that you don’t.
Comply with Wage Laws
Live-out nannies are classified as non-exempt workers and are protected by the Fair Labor Standards Act. This means that they must be paid at least minimum wage for every hour worker. While there are state and federal minimum wage laws, your nanny is entitled to the higher of the two.
In addition to being paid at least minimum wage, live-out nannies are also required to be paid overtime at the rate of 1.5 times their base hourly wage rate for all hours worked over 40 in a 7-day period.
If you have been discussing wages in terms of straight salary, it’s important to break down that salary into base and hourly wage rates. If a nanny earns a gross weekly of $600 for 45 hours of work, the base hourly wage for the first 40 hours would be $12.63 and the overtime differential would be $18.94 for the 5 overtime hours, totaling a weekly gross salary of $600.
To properly calculate your nanny’s hours worked, you are responsible for keeping track of your nanny’s working hours. Keep a notebook on the counter for your nanny to sign in and sign out of each day. She can indicate the time she arrived and departed next to her name.
Comply with Tax Laws
As a nanny employer you will have tax obligations and responsibilities. All household employers who pay their nanny more than the annual wage threshold which as of 2012 is $1800 are required to pay employer taxes. These tax responsibilities are equal to about 10% of the nanny’s gross annual salary.
Nanny employers must pay the employer portion of the Social Security and Medicare tax, commonly referred to as FICA. They must also pay federal unemployment taxes, commonly referred to as FUCA and any state unemployment taxes or other taxes or insurances, such as disability, as required.
Since nannies are unable to pay FICA on their own, it’s their employer’s responsibility to withhold and remit their portion.
Since nannies are not independent contractors and are employers of the families for whom they work, they must be provided a w-2 form at the end of each year. Misclassifying your employee as an independent contractor and issuing a form 1099 instead can result in fines and penalties when caught.
For parents who own businesses, it can be tempting to simply put their nanny on payroll and be done with it. Doing so, however is illegal. Since your nanny doesn’t directly contribute to the income of the business, claiming she does is illegal. You can, however, take personal tax breaks related to childcare expenditures.
For parents who choose to pay on the books, when they are compliant with tax laws they can reap the benefits. Tax incentives and breaks can offset the cost of paying a nanny legally and sometimes the tax savings a family receives is more than their tax obligation.
Check with your company to see if you have a Dependent Care Account or Flexible Spending Account. If so, you may be able to contribute up to $5000 in pretax earnings.
If you don’t have access to these accounts, you may still be able to claim the Tax Credit for Child Care on your income tax returns.
Vacations and Traveling
It is industry standard for nannies to be paid for 52 weeks per year. If a nanny has two weeks of vacation time, it is customary for the family to choose one week and the nanny to choose one week. This allows everyone to some control over when they get vacation.
If a family choose to give the nanny time off because they wish to travel without her, they should still compensate her for her regular salary because she was available to work. It’s unfair for the nanny to be penalized for a change in schedule that was out of her control.
If you choose to vacation and take your nanny with you, you are responsible for covering all of her travel, food and lodging expenses. In addition, she should be paid for any overtime hours worked in addition to her normal weekly rate. Since you nanny will be away from home and unable to leave the job, most families also offer the nanny a stipend for traveling with them to compensate her for the inconvenience of being away from home.
Before making vacation or travel plans with your nanny, it’s always best to discuss any changes to the normal schedule and salary. Put these working arrangements in writing to avoid and miscommunications and misunderstandings during the trip.
While you can certainly figure out your nanny’s weekly gross and net salary and write a personal check for the proper amount, for many nanny employers using a reputable nanny payroll and tax service is much easier.
Reputable companies like 4nannytaxes.com provide full service payroll and tax services for household employees. They’ll calculate the weekly pay amount and even direct deposit it into your nanny’s checking account. At the end of the year they’ll even prepare the w-2 and get it into the hands of your nanny.