You just hired or plan to hire an in-home babysitter. The hiring process can be exhausting to find the right caregiver for your children, especially in a tight babysitting job market. but it will be worth it. The nannies will provide your child with personal attention and personalized attention while you enjoy the flexibility of schedules without the hassles of dropping off and picking up daycare.
You are now a domestic employer and have some additional responsibilities to pay your babysitter and remit employment taxes.
You are reading: How to pay nanny on the books
what does it mean to pay for a babysitter in the books?
In the world of housework, you often hear phrases like “in the books” and “under the table.” what does all this mean?
Paying a babysitter “on the books”, rather than “under the table” simply means that you are doing things the right way and treating your babysitter like a professional caregiver. she is paying them in accordance with applicable tax, wage and labor laws and properly withholding and remitting taxes.
means you never have to worry about getting caught evading your tax obligations and paying those taxes plus interest on taxes owed, fines and penalties.
For licensed professionals, C-level executives, and those in the financial industries, being accused of tax fraud can put your career in jeopardy. a lawyer can be disqualified. a doctor can lose his license to practice. government employees and contractors may lose their security clearances.
While you’ll have peace of mind, it also means you have to tackle a bit of paperwork and put in some time and effort to get it right. The IRS estimates that it takes at least 60 hours a year to manage nanny payroll and taxes on your own. Of course, you can save yourself some time and let GTM’s payroll services handle everything for you.
how do you pay your nanny in the books?
We have a tax guide for nannies that walks you through the process step-by-step, as well as a downloadable resource, The Complete Guide to Household Payroll, to use as a reference.
The steps, in short, are:
1. obtain your federal employer identification number (ein) from the irs. 2. Set up employer accounts with your state tax agency. 3. File a new hire report in your state. 4. Obtain workers’ compensation insurance if a policy is required in your state (optional coverage may also be a good idea). 4. Provide your nanny with Form W-4 (for your income tax withholdings) and Form I-9 (for employment eligibility verification). 5. Withhold social security and medicare (fica) taxes from each paycheck (you’ll pay the same amount – 7.65% in employer taxes), as well as income taxes. 6. Quarterly, remit federal taxes (social security, medicare, and federal unemployment) using form 1040-es, as well as state unemployment taxes to your state tax agency. 7. Before January 31, provide your nanny with the w-2 form for the previous year’s wages. Submit a copy of Form W-2 and Form W-3 to the Social Security Administration by the same date. 8. File Schedule H with your personal return.
what are my employer’s responsibilities when paying a nanny on the books?
As an employer, you are responsible for:
- your portion of the fica taxes (7.65% of your nanny’s gross wages)
- federal unemployment taxes (6% of the first $7,000 in wages, which can be reduced to 0 .6% or a maximum of $420)
- state unemployment taxes (these vary by state, but can cost a few hundred dollars)
- workers’ compensation insurance (if required in your state, can be as low as a few hundred to about a thousand dollars)
- paid sick leave (if your state has a paid sick leave program, you may need to do a small contribution)
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See our state-by-state guides to domestic employment regulations.
how much will it cost to pay for a babysitter in the books?
You can expect to pay 10 to 15 percent of your nanny’s salary in taxes and other obligations, such as workers’ compensation.
Use a nanny tax calculator to help you determine your employer’s liability based on your nanny’s salary. Your employee can also use the calculator to determine her tax liability and her take-home pay.
what are the tax advantages of paying on the books?
So far we’ve talked about what you’ll need to pay to get your babysitter’s payroll and taxes right. but there are some financial advantages. In fact, paying a babysitter on the books can be cheaper than paying under the table due to increases in the Child and Dependent Care Tax Credit and FSA Dependent Care contributions. Those two tax breaks can save you thousands of dollars and more than cover any nanny tax liability.
In 2021, the maximum amount of child care expenses (such as wages paid to a babysitter) you can apply to the child and dependent care tax credit is $8,000 for one child and $16,000 for two or more children. the total maximum credit amount is $4,000 (50 percent of $8,000) if you have one qualifying person and $8,000 (50 percent of $16,000) if you have two or more qualifying people. the 50 percent amount begins to phase out if your adjusted gross income is greater than $125,000 and phases out if your adjusted gross income is greater than $438,000.
In 2021, the dependent care fsa contribution limit increased to $10,500. wages paid to a babysitter are a qualifying expense for a dependent care fsa. Since these contributions are made on a pre-tax basis, they reduce your taxable income and reduce your income and FICA taxes.
How much you’ll save depends on your tax bracket and state and/or local tax rates. You could save 35 to 46 percent of the funds you put into a dependent care fsa. That means if you have at least $10,500 in child care expenses and you max out your FSA and you could save $3,300 – $4,700.
what if my babysitter doesn’t want to be paid on the books?
To be frank, it’s not your choice. it is your decision and you can make it a condition of employment. you have a lot to risk and, besides, do you really want to start a relationship with your child’s caregiver committing tax evasion?
Some nannies may not understand how they benefit from being paid on the books. They might just see it as taking home less money without understanding the benefits of doing it the right way.
When legally paid, nannies can receive unemployment benefits if they lose their job through no fault of their own. The pandemic hit the domestic employment industry very hard as parents laid off their nannies during the health crisis. those who were paid “off the books” had difficulty obtaining unemployment, including additional benefits provided by the state and federal governments, because their nanny families had not been paying unemployment taxes.
With an employment history that provides “on the books” pay, nannies will have an easier time obtaining credit, loans, or a mortgage. the legal payment shows that they have a job and a regular income, which can help if they want to rent an apartment.
nannies also receive social security and medicare benefits when they are older and no longer working.
how can i get stuck without paying on the books?
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It’s pretty easy. consider these scenarios:
Her children are now of school age, so she no longer needs a full-time babysitter. they part amicably but apply for unemployment. however, the state labor agency has no record of your employment or contributions to unemployment tax. expect to pay those taxes with interest and incur fines and penalties.
Your babysitter gets hurt at work. they will miss work and incur medical expenses that they expect you to help cover. but you do not have the required workers’ compensation coverage. a claim is made and you are exposed for not having a policy. those penalties can easily run into the tens of thousands of dollars for lack of coverage.
Your babysitter is upset about the low wages and long working hours. file a wage claim with the state labor agency. She is asked to submit payroll records to show that she has been paying at least minimum wage and time and a half for overtime. this can be complicated without proof of legal payment and can even lead to a civil lawsuit.
Getting caught isn’t cheap.
If the IRS finds out, you’ll have to pay the FICA taxes you owe, and then they can penalize you up to 100 percent on that amount.
didn’t pay unemployment taxes? Not only will you pay the taxes you missed, but the penalties can also add up to 50 percent of the tax due.
Lack of workers’ compensation insurance can result in fines of up to $5,000 for each ten-day period of non-compliance. each state will be a little different.
Is treating my nanny as an independent contractor the same as paying on the books?
The IRS has made it clear that nannies are employees and not independent contractors. Families control their caregiver’s schedule, determine their job responsibilities, and provide the tools and equipment to get the job done.
Classifying your nanny as an independent contractor and providing her with a 1099 and not a w-2 at the end of the year is considered tax evasion as your nanny is trapped paying both employer and employee fiat taxes while you avoid your fica, unemployment, and workers’ compensation obligations.
gtm can help
Want to pay your babysitter “on the books” but avoid the hassle of doing it yourself? then call us at (800) 929-9213. We can take care of everything for you, from setting up your employer accounts to paying your babysitter to filling out year-end forms. our team of home employment experts and certified payroll professionals have you covered. questions? Give us a call or schedule a time to speak with us for a free, no-obligation consultation with a member of our team.
download the complete guide to household payroll
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