- Is a nanny an employee, or can she be classified as an independent contractor?
- If a nanny is an employee, what taxes need to be withheld?
- Do I have taxes as an employer?
- What are my tax breaks?
- What about overtime pay?
- What are the vacation, holiday and sick pay requirements?
- What is the process for handling payroll and taxes?
- What is Worker’s Compensation?
- What should I know about Nanny Health Insurance?
- Can I run my nanny’s payroll through my own business?
Is a nanny an employee, or can she be classified as an independent contractor?
Nannies and most other household workers are employees of the family for which they work. If the family controls work hours, work place, responsibilities, work tools (to name just a few), the worker is their employee. An independent contractor usually provides her own tools, her own place of work, sets her own hours and offers services to the general public.The IRS views household workers to be employees – with very few exceptions. If you’d like a formal ruling, you can obtain one from the IRS by filling out Form SS-8.
If a nanny is an employee, what taxes need to be withheld?
Your nanny’s taxes usually range from 15-20% of gross wages. These include:
Half of Social Security & Medicare (7.65%)
Federal income taxes
State income taxes (if applicable)
Note: By law, employers are required to withhold Social Security and Medicare taxes from their employee’s salary each pay period. Withholding income taxes is optional, but it’s highly recommended so that your employee does not get surprised with a large tax obligation at year end.
Do I have taxes as an employer?
Yes. Household employers can expect to pay employment taxes that amount to approximately 10% of their employee’s gross wages. These include:
Half of Social Security & Medicare (7.65%)
Federal and state unemployment insurance Good News! The employer tax obligation can be largely – if not completely – offset by tax breaks.
What are my tax breaks?
Yes. To lighten the burden that falls on working parents, Congress has enacted tax benefits for families through employer-provided dependent care assistance (Dependent Care Account) and the Tax Credit for Child or Dependent Care. However, these tax breaks are only available if the employee is paid legally.
Dependent Care Account. Most companies allow employees with child or dependent care expenses to contribute uDIVto $5,000 of their pretax earnings to an individual Dependent Care Account. The money in this account is then used to cover childcare expenses, free of taxes. The savings are approximately $2,300 per year.
Tax Credit. For those who don’t have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care (Form 2441) on their income tax return at year-end. Basically, they can take a tax credit of 20% to 30% of qualifying childcare expenses. But only expenses of uDIVto $3,000 for one dependent, or up to $6,000 for two or more dependents can be counted.
Note: Only one of these tax savings options may be used each year. The Dependent Care Account usually provides the greater tax savings. Oftentimes, the tax savings exceed the employer’s share of the taxes, actually saving money by being legal!
Do I have to pay overtime?
According to federal law, household employees are entitled to overtime pay. Overtime must be paid at 1.5 times the hourly wage for all hours worked over 40 in a 7 day workweek. If a nanny is paid a salary, overtime should be addressed in the contract.
For example;
A nanny and family agree upon a gross salary of $600 per week for a 45-hour work-week.
The standard wage for the first 40 hours is $12.63 per hour;
The overtime wage for the additional 5 (overtime) hours per week is $18.95 per hour (12.63 X 1.5)
And the total weekly salary = $599.95.
No limit is placed on the number of hours worked in a 7 day workweek, as long as the employment contract is fulfilled and the employee is fairly compensated. Please note that live-in household employees do not have to be paid overtime but are entitled to the regular wage for every hour worked.
[Childcare Solutions Notes:]
1. Overtime laws and regulations may not be waived by agreement between the family and the care-provider. This is FEDERAL law. State laws, which vary widely, may go beyond the federal law, but may not under any circumstance nullify federal law. Be sure to check with your state's depratment of labor (hours & wage division) to determine your local minimum wage rate and applicable overtime regulations.
2. The method used to calculate overtime wages can vary depending on whether a nanny is employed "at-will" and paid on a weekly basis or if she is under contract to work a specified number of hours per week. The U.S. Department of labor specifies one method of wage calculation that shall be used for employees working "at will". If your nanny is under contract to work a specific number of hours per week, it may be advantageous to use an alternate method of calculating the 'standard hourly wage rate' and the 'overtime hourly wage rate'. Please see the "Nanny Wage Rate Calculations" section of our "How Do We Compensate Our Nanny?" FAQ for details and examples.
Click HERE for our Nanny Salary Calculator for employees under contract.
Click HERE for a listing of STATE DOL offices and websites.
Click HERE for an interactive map that will display the current Minimum Wage in your state.
What are the vacation, holiday and sick pay requirements?
Paid vacation, holidays and sick days are not required by law. These benefits are to be agreed upon as a part of the employment contract. In addition, overtime is not required for holidays worked.
What is the process for handling payroll and taxes?
The payroll and tax process is quite detailed. Here’s an overview of what’s involved:Comprehensive payroll and tax services specially designed for household employers are available to make this process simple and provide peace of mind at an affordable price. Ask us for a referral.
- Research employment tax and labor laws to understand legal obligations.
- Register for federal and state tax accounts.
- Complete and file New Hire Reporting.
- Identify and calculate taxes to withhold each pay period.
- Track gross pay, net pay and taxes withheld.
- Calculate the employer’s federal and state tax liabilities.
- Prepare state and federal tax returns quarterly and remit the employer and employee taxes.
- Prepare year-end tax documents (Form W-2, Form W-3, Schedule H and State Annual Reconciliation).
- Respond to IRS and state inquiries.
- Monitor ever-changing household employment tax law.
What is Worker’s Compensation?
Every state has a worker’s compensation system. Under these systems, workers injured on the job are entitled to prompt payment of certain medical and wage-loss benefits with a minimum of legal formality and expense. The systems are based on the idea that the employee gives up the right to sue for any injuries from work-related accidents, in exchange for receiving benefits regardless of fault. While some states exclude household services from the worker’s compensation system, the State of Ohio requires all employers to carry a Worker's Compensation policy.For detailed information about Ohio Worker's Compensation requirements and procedures you may call the Ohio Bureau of Worker's Compensation (BWC) at 800-644-6292... or call Breedlove & Associates at 888-273-3356 for a complimentary consultation.
Are there any tax breaks if I offer health insurance?
Yes. And they can be significant for both you and and your employee.When a household employer contributes toward health insurance premiums, these dollars are not considered taxable income. Neither employer nor employee is required to pay taxes on these dollars. A family may choose to pay the healthcare premium directly to the health insurance company or give these dollars directly to their employee. (In the latter case, the family must keep a copy of a current health insurance card on file for proof of a current insurance policy)
The nanny I’m about to hire would like to have Health Insurance as part of her compensation package. How does that work?
Health insurance premiums are a non-taxable form of compensation, meaning neither you nor your nanny would have any taxes on that portion of her compensation. Therefore, there is a significant financial advantage to both of you if part of your compensation to her goes toward a health insurance premium.Here’s how the tax math works. Let’s say you pay your employee $2,000 per month in “straight” (taxable) wages. Her “take-home pay” after taxes would be roughly $1,700 per month (it may be a few dollars higher or lower depending on her personal tax situation). If she then buys a health insurance policy and pays $300 per month, her after-tax “disposable” income is $1,400 per month.
Alternatively, if you pay the same $2,000 per month, but it includes the health insurance contribution (i.e. $1,700 in taxable wages plus $300 in health insurance contributions), her after-tax disposable income is $1,475 per month.
So, in this illustration, your nanny sees a real gain of $75 per month (or $900 per year) and your employer taxes are reduced by about $25 per month (or $300 per year) – simply by having healthcare contributions managed through the payroll process. It’s a win-win situation.
Why can't my nanny just pay for her own health insurance policy and then deduct the premium expense on her itemized tax return?
The nanny would not receive $900 per year in a tax refund if she paid for health insurance premiums with after-tax dollars. This option does not exist. She is only $900 richer if the health insurance premiums are separated from her taxable wages and she is taxed on a smaller amount of wages. She does not have the option of paying for health insurance premiums with after tax dollars (as shown in the first part of the example) and then taking a refund equal to the amount of tax on the dollars used for health insurance premiums. The law (as of 2007) states that health insurance premiums paid by an individual must be paid with after-tax dollars.Only an employer can contribute tax-free.
If a nanny pays for health insurance on her own without assistance from her employer, she must have her entire monthly salary taxed and then pay for health insurance as an after-tax expense. She will not receive a refund or write-off on her health insurance premiums. Therefore, the only way to generate savings on health insurance premiums is by having the employer provide the dollars for this expense. Employers can contribute to health insurance premiums tax-free. This can be done by providing money for premiums over and above the salary, which is a significant financial benefit.
In our example, the employer is not increasing their cost by providing health insurance, but they are saving their nanny $900 per year by reducing her salary by the amount of the health insurance premiums. If the nanny was going to pay $300 per month for health insurance in any event, she might as well pay for it with pre-tax dollars provided by her employer rather than after-tax dollars on her own. The $900 savings is generated by taxing a lower monthly gross income ($1700 vs. $2000). The nanny increases her net pay by $75 per month in receiving $300 from her employer tax-free to use toward health insurance premiums.
This is the only way to receive a tax savings on health insurance premiums. When she is taxed on the full $2000, she pays taxes on the $300 used for health insurance premiums. Uncle Sam is not holding a tax refund - she owes the $900 in taxes as she has higher taxable wages ($2000 vs. $1700).
If you have any questions about health insurance or how to set it up so you can take advantage of these tax breaks, call Breedlove & Associates. Breedlove is happy to provide a complimentary phone consultation and guide you through all the financial and legal aspects of being a household employer.
Can I run my nanny’s payroll through my own business?
No. This is illegal. Here’s a simple explanation: All businesses are allowed to take tax deductions on employee payroll. The logic is that employees are direct contributors to the success of the business, and the owner is allowed a “tax break” on a portion of total payroll to offset some of this expense. A nanny does not directly contribute to a business; therefore, it is illegal for a business to receive any kind of “tax break” on her payroll. A nanny is considered a contributing member of the household; therefore, a family is entitled to take a “tax break” on her payroll as a childcare expense instead.
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