Families who have been paying a babysitter or nanny over the summer to provide childcare may be able to cut back now that school is in session, but that doesn’t mean they can avoid the so-called “nanny tax.”
“Families should make sure they tie up all those loose ends before they move on with the rest of their year so that it doesn’t make tax time come April even more complicated than it has to be,” said Kerri Swope, senior director of Care.com HomePay. “One of the ways to do that is making sure they are paying attention to how much they paid that caregiver over the course of the summer, because that is one of the key indicators of whether they are going to have tax responsibilities or not.”
For example, if the family paid a caregiver $2,000 or more, the IRS will then consider the caregiver to be an employee.
“The IRS considers that babysitter or nanny that was working in the home for the family over the course of the summer to be the employee of the family, which makes the family a household employer,” said Swope. “That’s one important thing for the family to be thinking of and makes them responsible for having to withhold and pay taxes on the wages they paid to that caregiver throughout the summer. If they paid more than $2,000 to that nanny over the course of the summer, the IRS says they must withhold at least Social Security and Medicare taxes from that caregiver’s paycheck. Then they are also responsible for matching an equal amount of Social Security and Medicare as the employer.”
In addition to the $2,000 threshold, there is also a $1,000 threshold.
“If they paid more than $1,000 over the course of the summer, they’re also going to owe federal and state unemployment taxes as an employer,” said Swope. “Those will all get paid in over the course of a year. Unlike your personal income taxes, which you can pay to the IRS in April when you file your personal income tax returns, household employment taxes are actually due throughout the course of the year. One thing a family will want to make note of is not waiting until April to pay those taxes that they’ve withheld from their caregiver. They’ll want to pay those in at the end of each calendar quarter that she worked for them.”
With the third quarter of the year wrapping up soon, families may no longer need a summertime caregiver but will still need to pay those taxes to the IRS and the state by the end of September, she noted.
Many families continue to need caregivers for their kids even after the school year starts, of course.
“Once summer is over and maybe they don’t need a full-time nanny or daycare over the course of the summer, most families go back to their normal routine or opt for after-school care,” said Swope. “They may potentially continue to use an in-home caregiver for after-school care once kids are out of school, in the evenings before they come home from work, so that will add to their tax responsibilities, and that $2,000 threshold is pretty easy to cross.”
Care.com did a survey of babysitting and nanny hourly rates last year, and found the national average hourly rate for a babysitter was about $15 per hour, and for a full-time nanny it was $13.91 an hour.
“If they have a full-time nanny over the course of the summer working full time, 40 hours a week, even just for the eight weeks of the summer, they’ve already crossed that threshold,” said Swope.
Despite the tax responsibilities, there are also some potential tax benefits for families to help defray the costs of childcare. Care.com HomePay has online interactive Nanny Tax Calculators that families can use to estimate their payroll taxes and tax breaks for the summer.
“It’s not all bad news about having to deal with taxes just because they had a caregiver over the course of the summer,” said Swope. “It does come with good news, which is that if they follow those tax rules for their summer nanny, the IRS does reward them with tax breaks. Most of the time a family who hired a nanny for the summer is able to offset those tax costs either completely or significantly by taking advantage of the tax breaks. Sometimes it’s even more than what they paid in taxes, so they’re chipping away at the overall cost of hiring a nanny in the first place. They can take advantage of dependent care accounts, which are kind of like a flexible spending account, or a childcare tax credit. ln either event, they’ll want to make sure they’ve gotten their nanny’s Social Security number and address, so they can take advantage of those tax breaks and send her that important W-2 form at the end of the year.”