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Nanny Tax Compliance: What You Need to Know

If you are considering hiring a nanny as your child care provider, here are a few points to keep in mind. There are many advantages to hiring a nanny to work in your home such as keeping your child in their own surroundings for naps, meals, and playtime. A nanny working in your home may also assist with light housework, laundry, homework, or meal preparation if you so desire. But before hiring a nanny, you must understand how to handle the payroll and tax compliance issues that are required by the Internal Revenue Service as well as the individual state tax authorities.

It is very important to handle the payroll and tax issues correctly on both the Federal and State level. Household employers are required to withhold FICA taxes (made up of Social Security and Medicare) on employee wages. Federal and State Unemployment Insurance contributions are also required as an employer liability; meaning they may not be withheld from employee's wages. While Federal and State income tax is not required to be withheld, household employees are liable for these taxes and must file personal income tax returns. If employees do not opt to have the income taxes withheld from their paychecks, they should make Federal and State estimated tax payments throughout the year to cover this tax liability. If however, your employee requests that you withhold the income taxes from their wages, then you must do so and remit the taxes to the appropriate agencies.

Prior to the first day of work, employers should give the new employee official paperwork to complete consisting of the Form W-4, Employee's Withholding Allowance Certificate and the Form I-9, Employment Eligibility Verification. If the employer were to encounter a payroll or tax audit, it is crucial for employers to be able to show proof that their employee's eligibility to work was verified and documented at the time of hire. Records of any payroll, tax returns, and tax payments must also be maintained.

Tax compliance records should include copies of the withholding and unemployment returns and proof of payments filed throughout the year. Most states have a quarterly filing requirement for these taxes; while a few states allow household employers to file once a year, or annually. Also, at the end of each payroll year, employers are required to issue a Form W-2, Wage and Tax Statement to their employee. The W-2 is a summary of total compensation as well as tax withholding throughout the year. The employee will use the W-2 when preparing their own Federal and State personal income tax returns.

Additionally, employers will send the Form W-3 and Copy A of the W-2 to the Social Security Administration for wage and tax reporting purposes. If state income tax was withheld from the employee's wages, a State Annual Wage Reconciliation will be required as well. Finally, the Schedule H, Household Employment Tax report, will be used to report wages and taxes withheld. The employer will use the tax liability from the Schedule H and add this to their personal income tax return (Form 1040) by April 15th of the following year.

Though this may seem like a very complicated process, there are tax services available to assist you in remaining compliant with your household employment tax issues. It is important to note that household employees include more than nannies. Families may hire a housekeeper, gardener, butler, nurse and/or personal assistant to name a few. All of these would fall into the same category for household taxes as a nanny or childcare provider.

To obtain more information on household employment taxes, please visit www.payyournanny.com or contact Barbara Yudd directly at 703-819-9796 or via email byudd@payyournanny.com. Barbara Yudd is a professional accounting consultant with over 20 years of experience specializing in payroll and tax compliance issues. Payyournanny.com is a nationwide payroll and tax service that has been assisting families in payroll tax compliance for more than 17 years.