The Nanny Tax

Like many families, when the kids are out of school for the summer you need someone to watch them while you are at work. This small act to ensure the safety of our children may come back to get us in the end. Just because we send them back to school does not mean we can avoid paying the “Nanny Tax.”

So what is the “Nanny Tax”? According to the IRS, if you pay anyone $2000 or more they are considered an employee. That means if you hire a nanny or caregiver for the summer they become an employee of the family. It makes you responsible for withholding and pay taxes on the wages you pay the caregiver over the summer. If it is over $2000, then Social Security and Medicare taxes. You are also responsible for matching the amount of Social Security and Medicare as the employer. This makes a simple task for parents into something complicated and unwanted.

There is another threshold we have to look at when it comes to having employees, and that is the $1000 threshold. At this point, as an employer, you are required to pay federal and state unemployment taxes.

Now, even though that is all the taxes you pay, it has a different time line than personal income taxes. Employer taxes are due throughout the year. Many time they are paid at the end of each calendar quarter.

There is some good news. If you pay the taxes and follow the rules, the IRS does reward you with tax breaks that may offset the cost. You can take advantage of dependent care accounts, which is set up like a flexible spending account, or the childcare tax credit. Both of which sometimes gives you more back than what you paid. The only thing you need to be able to take advantage of those tax breaks is the nanny/caregivers Social Security number, address, and send them a W-2 form at the end of the year.