If you use the services of a nanny, did you realize that you are required to pay taxes just like any employer would?
Many parents are not aware of their responsibilities around “nanny taxes.” So we asked Laura Weiland, president of The Nanny Tax Company, a tax preparation company in Park Ridge, for the scoop. Here’s what you need to know.
I have a nanny; how do I know if I need to pay taxes?
Even if you don’t have a full-time nanny (or housekeeper or assistant who works in your home), you may need to file taxes. Weiland says anyone who pays someone $1,000 a year or more to work in their home is liable for state and federal unemployment taxes. And, if you pay a worker at least $1,800, you are also responsible for the employer portion of Medicare and social security taxes.
I know people who don’t pay nanny taxes. Is it really illegal not to file?
The short answer is yes. “The IRS is understaffed, so people think, ‘What are the chances I’ll get audited?’ But someone might get on the IRS’s radar. Say the kids go to school and the nanny goes to file for unemployment benefits and the employer portion has never been paid. The employer would have to file back taxes. You’re not going to get thrown in jail, but it becomes problematic.”
How much is this going to cost me?
Weiland says you should plan on spending 10 percent of your nanny’s gross wages on taxes.
Is there a legal way to reduce my nanny tax bill?
If you or your spouse has a flexible spending account at work, Weiland says you can have up to $5,000 deducted annually from your paycheck, and those tax-free funds can be used to help cover your nanny tax. “If you don’t have a flexible spending account, you can take a dependent care credit on your tax return,” Weiland says. “$1,200 was the most you could deduct last year.”
How do I pay nanny taxes?
First you have to register with the IRS and the Illinois Department of Employment Security as a household employer, Weiland says. You can request to file taxes annually instead of quarterly. Let your tax preparer know you employ a nanny so he or she can include that additional expense in your tax planning. You can hire The Nanny Tax Company to take care of all nanny tax filings for $475 a year plus a one-time $100 registration fee.