The Tax Implications of Having a Nanny or Housekeeper

Tax Tips Smiling nanny and preschool kid girl drawing with colored pencils sitting on sofa together

For many couples, juggling time with the family along with work obligations means something has got to give. A solution that some families have found to be a wonderful arrangement is hiring a nanny or housekeeper.

Having a capable professional that can assist and share their expertise is often invaluable.

I have a friend who was a nanny for a family for many years, and her role allowed the parents to be able to take care of their professional duties in the healthcare industries and free up some of their time so that they could be more engaged with their kids when they finished work. 

As the kids got older and the family’s needs changed, her role changed and evolved to take care of household management, which proved to be a fantastic situation where all sides continued to feel fulfilled and balanced. 

How Do Taxes Work for a Nanny or a Housekeeper? 

If you’re thinking about hiring a nanny or a housekeeper, you may have some questions about how it will work — especially when it comes to finances. 

You might have questions such as:

What is the typical pay for a nanny or housekeeper based on your location and their experience? Do you have to pay taxes? If so, how much do you have to pay? Are they an employee or an independent contractor? 

Today I want to explain the essentials about the tax implications of having a nanny or housekeeper.

Does My Nanny or Housekeeper Qualify as a Household Employee? 

One of the first things you need to review is whether your nanny or housekeeper qualifies as a household employee. 

If you are paying them more than $2,100 in a calendar year, then they are considered a household employee in the eyes of the IRS. That means you’re expected to pay employment taxes for them. 

Note wages you pay to your spouse, your child under the age of 21, your parent, and any employee under the age of 18 at any time in 2019 don’t count.

What Tax Forms Do We Need to Submit? 

You’re not required to withhold federal income tax from wages you pay to a household employee, but if your employee asks you to withhold federal income tax and you agree, you’ll need to have them fill out a W-4 Employee’s Withholding Certificate so you can withhold the proper amount of federal taxes from their pay

At tax time you’ll need to file a Form W-2 reporting your household employee’s income earned and withholdings and  Form W-3 Transmittal of Wage and Tax Statements with the Social Security Administration. Both forms will need to be filed by January 31st.

You will need certain pieces of information such as your household employee’s

  • Federal (and possibly state) income tax withholding selections if they want federal income tax withheld
  • Social Security number
  • Mailing Address (when it’s time to mail them their W-2s)

When you file your 2019 federal income tax return in 2020, you will also file Schedule H where your total household employment taxes (social security, Medicare, FUTA, and withheld federal income taxes) are reported.

What Taxes Do You Need to Pay for Your Nanny or Housekeeper?

As your nanny’s employer, you’re expected to pay your portion of Social Security and Medicare taxes, which is 7.65% of his or her gross wages (6.2% goes to Social Security, 1.45% for Medicare). 

So if their gross pay is $1000, then you would be responsible to pay $76.50. 

When you’re issuing your household employee’s paycheck, you will also deduct your employee’s share (also 7.65%) from their gross pay. In this case, they would have $76.50 deducted from their gross pay. 

You may also have to pay federal unemployment taxes (FUTA) of 6% on wages up to $7,000.

What are the Tax Benefits of Hiring a Nanny?

It may seem like hiring a nanny or housekeeper can be pretty expensive, but there are some great tax benefits too.  

Two big ones include: 

  • Dependent Care Benefit Accounts: Think of this as a flexible spending account for your childcare. Parents can contribute up to $5,000 tax-free for childcare, including your nanny.
  • Child and Dependent Care Credit: This tax credit can be worth up to $1,050 for one child and $2,100 for two or more kids under 13(no age limit if disabled) if you pay someone to take care of your kids so you can work or even look for work. Since this is a tax credit it will reduce your tax bill dollar for dollar.

Your Take on Hiring a Housekeeper or Nanny

For those of you who’ve hired a housekeeper or nanny, what are some benefits you’ve seen?

Don’t worry about knowing these tax rules. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent, with an average 15 years experience to get your tax questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish, year-round and can also review, sign and file your tax return.

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