Setting up for Paying a Nanny

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I found an old topic here: http://www.fatwallet.com/forums/finance/1066857/ , but it seemed that the OP there was already past my point. My sister hired a nanny and said there is some payroll issues that need to be addressed when doing it, but she didn't know what it was because her husband did all the work (and I can never seem to get him cornered to talk about it). So, I'm curious from the membership here, if my wife and I hire a nanny so that my wife can go back to work, what steps do we need to go through to make sure we're meeting all the requirements as far as paying this person, withholding for taxes, paying payroll tax (if necessary), etc. My sister indicated that we would need to set up some type of federal entity. Is this true? All help is appreciated.

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It depends on the service. The service I used didn't want to get involved with nanny tax issues. That only provided re... (more)

glxpass (May. 10, 2012 @ 4:54p) |

The above is true ONLY if your nanny is live-out. If you have a live-in nanny, she is paid straight time only (for exam... (more)

Kanosh (May. 10, 2012 @ 6:08p) |

We had a live-in nanny for several years. Sure, it took some time to figure out, but once I got everything set up, it r... (more)

dcwilbur (May. 10, 2012 @ 8:26p) |

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awstick said:   http://www.irs.gov/pub/irs-pdf/p926.pdf

In addition to that publication, make sure you followup on your state's filing requirements for household employer taxes. Some states may require you to file quarterly for household wages and unemployment taxes. Most states will also have a brochure on their department of revenue's website.

Personally, I can fully understand why no one would want to pay a baby sitter with nothing but cash.

For years, I did it legally.

I had to get a Federal Employer Tax ID.
I had to file quarterly Wages/Unemployment Tax Returns with the state.
I had to pay a default 5.5% Unemployment Tax Rate with the state.
I had to file an annual Schedule H and pay 15.3% Payroll Tax PLUS a 0.8% Federal Unemployment Tax Rate.

I did it because the child tax credits made it a break even proposition.

Now for the kicker. Now that the kids were old enough, we stopped paying for babysitting. I suggested to the babysitter to collect unemployment because she was technically laid off and I paid in for it all those years. She was ultimately told that her income level was too low to be eligible to collect an unemployment check.

Edit to add, you have to file annually with the SSA's BSO to create the W2.

"...why no one would want to pay a baby sitter with nothing but cash..."

OP, do you plan to run for a public office some day?

There are several nanny-tax payroll services that will do all the paperwork for you, specific to your state. Google "nanny payroll service" or similar words.

hebron1427 said:   but she didn't know what it was because her husband did all the work (and I can never seem to get him cornered to talk about it)Are you sure you even want to know?

Kanosh said:   There are several nanny-tax payroll services that will do all the paperwork for you, specific to your state. Google "nanny payroll service" or similar words.This is the route I'd go.

Let the agency deal with verifying immigration status, taxes, SS, all that stuff.

Hebron, I'm curious. Why do you want to pay her legitimately?

xoneinax said:   hebron1427 said:   but she didn't know what it was because her husband did all the work (and I can never seem to get him cornered to talk about it)Are you sure you even want to know?

Lol, I'll bet a Hub Cab that the husband is paying cash under the table.

On a side note, my wife nannies part time, and gets paid cash. Good deal for her, not as good of a deal for her bosses (no childcare credit).

pics?

wordgirl said:   Kanosh said:   There are several nanny-tax payroll services that will do all the paperwork for you, specific to your state. Google "nanny payroll service" or similar words.This is the route I'd go.

Let the agency deal with verifying immigration status, taxes, SS, all that stuff.


Yeah, forgot about that one too, every year you have to log into Social Security's Business Services Online to Create the W2 and transmit the info to Social Security. Best part about that is you do it once a year, but your password expires every 90 days. I believe last time I let it expire, I had to wait for the new one to arrive in the mail, but that was a few years ago, maybe you can reset it online now.

If OP decides to pay her legally, he is going to find out that his employment costs are far greater than just the simple wage that the nanny gets. You will likely have to pay a share of SS, medicare, worker's comp., unemployment insurance(possibly state and federal) and possibly other state or local taxes. It also involves keeping records and maintaining them for at least 3 years. Each state has different laws about household employees.

Any wonder why most people just pay their nanny with cash under the table or just have the mom stay home?

Also if you do it completely by the book, a nanny cannot be considered an exempt employee and must get overtime after 40 hours (at time and a half). Make sure you agree on a low enough base that if you use her for babysitting one night it is not going to cost you a fortune. When I did the calculations for our nanny I worked it out by getting the total I wanted to pay her per week and working backwards to what the base rate would be for 40 regular hours and 10 hours overtime, + the tax calculations. That way I have a few hours up my sleeve every week if I'm late from a meeting or need babysitting one night. If you want her to stay overnight the rules are different again.

Sources:
http://www.4nannytaxes.com/news/flsa.cfm
http://www.dol.gov/compliance/guide/minwage.htm

OP, what state are you in? I'm fresh on the info for CA (and IRS) if that helps.

Yes, the employer paying the "nanny taxes" is quite the burden. If you can make a reasonable argument that your nanny is not a household employee, but a sole proprietor, that is an easier way to go. IRS Pub 926 has details on whether that may be the case. If so, in our situation issuing the nanny a 1099 and having her file as self-employed was much easier, and puts the burden on the nanny.

If this is your nanny's full-time job, I'm sure he/she would appreciate doing things "by the book" so that they are eligible for SS, disability, and unemployment. In our case that was the driving factor.

gatzdon said:   wordgirl said:   Kanosh said:   There are several nanny-tax payroll services that will do all the paperwork for you, specific to your state. Google "nanny payroll service" or similar words.This is the route I'd go.

Let the agency deal with verifying immigration status, taxes, SS, all that stuff.


Yeah, forgot about that one too, every year you have to log into Social Security's Business Services Online to Create the W2 and transmit the info to Social Security. Best part about that is you do it once a year, but your password expires every 90 days. I believe last time I let it expire, I had to wait for the new one to arrive in the mail, but that was a few years ago, maybe you can reset it online now.


I did it this year and was able to get into the website. It was a hassle and I got a letter from them saying something about an employee with my name (slightly different spelling) trying to issue a W2 to another employee. It was me trying to do the right thing, so I ignored it. I did pay the taxes. More people would do it if they would make it a little easier. Turbo Tax offered to apply for a TIN for me. I already had one so I didn't need it, but the whole thing is a huge hassle and I expect to be audited over it in like 11 years when I have forgotten all about it.

We use a Nanny (so far for 2 months). She and her mother both own a LLC with a Tax ID Number (TIN). I just pay the LLC weekly at the agreeded upon rate. Am I doing something wrong by not claiming her as a homehold employee? The DCSA reimbursment that I have through work has no issues repaying me.

Trekwars2000, if the nanny is setup as a business and they're paying the employment taxes on their end then that should be legit. (assuming they're doing it legally on their end) You hired a company to provide a service so the LLC is the employer. Normally nannies are treated as employees of the household so the household has to act as the employer.

Yea, like jerosen said. It's the same as hiring a nanny/babysitter through a service, a housekeeper from a service, or lawn-mower, etc. They are employees of their own business, not your employee.

Slightly off topic, but it's a little funny how everyone is referring to the potential nanny as a girl. I understand why people would assume it's going to be a female, I just wanted to state how awesome it would be if OP updates with a pic of their new "bearded-manny".

I dont't think a picture of a bearded nanny is something I'd consider awesome.

brawa said:   Yea, like jerosen said. It's the same as hiring a nanny/babysitter through a service, a housekeeper from a service, or lawn-mower, etc. They are employees of their own business, not your employee.
It depends on the service. The service I used didn't want to get involved with nanny tax issues. That only provided referrals to housekeepers, nannies and other domestic employees registered with them. Our housekeeper thus became our domestic employee, with us withholding the taxes and filing the necessary State and Federal reports. Actually, we used a payroll service for this, although plenty of employers of domestic employees do it themselves to save money.

We didn't go the 1099 (independent contractor) route because IMO it wouldn't survive any scrutiny by the IRS, and it thus wasn't worth the risk.

tmonkey said:   Also if you do it completely by the book, a nanny cannot be considered an exempt employee and must get overtime after 40 hours (at time and a half). Make sure you agree on a low enough base that if you use her for babysitting one night it is not going to cost you a fortune. When I did the calculations for our nanny I worked it out by getting the total I wanted to pay her per week and working backwards to what the base rate would be for 40 regular hours and 10 hours overtime, + the tax calculations. That way I have a few hours up my sleeve every week if I'm late from a meeting or need babysitting one night. If you want her to stay overnight the rules are different again.

Sources:
http://www.4nannytaxes.com/news/flsa.cfm
http://www.dol.gov/compliance/guide/minwage.htm


The above is true ONLY if your nanny is live-out. If you have a live-in nanny, she is paid straight time only (for example, if she works 60 hours, she is paid 60 hours, not 40+30 hours as with overtime.

That said, the whole point of having a nanny, in my opinion, is having someone you absolutely trust and rely on to take care of your kids when you and your wife can't. That kind of trust seldom is built by trying to pay the lowest possible wage. That's why well-recommended, U.S. citizen nannies make surprisingly good money. Legally-employable foreign nannies are in high demand too. You can have them speak only in their language to the little ones, and in a short time, the little ones are fluent in french, mandarin, spanish, or whatever.

We had a live-in nanny for several years. Sure, it took some time to figure out, but once I got everything set up, it really wasn't that big of a deal. If you do your own taxes and manage your own finances, you can do this too. If you pay someone else to do that kind of thing for you, then hire a nanny payroll service.



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