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What is the Nanny Tax?

How to Cost-Effectively Handle Your NannyTaxes and Legal Obligations Without Work, Worry or Risk

Families who hire nannies are considered household employers – a distinct employer classification which carries some unique tax and legal obligations. Handling these obligations properly is very important for both you and your nanny. When done correctly, you'll prevent expensive and time-consuming tax and legal issues, you'll be entitled to at least one of the childcare tax breaks, and your employee will receive important short-term and long-term benefits and protections.

The Nanny Employer's Checklist

Here are the specific requirements of becoming a nanny employer. Please know that our partner, Breedlove & Associates. can handle all of the compliance requirements on your behalf with guaranteed accuracy. Specifically, they:
  • Establish your federal and state household employer tax accounts.
  • Complete and file your New Hire Report
  • Calculate the correct amount of federal and state taxes to withhold each pay period
  • Track your gross pay, net pay, federal taxes withheld and state taxes withheld
  • Prepare your state tax returns and remit both the employer and employee taxes quarterly
  • Prepare your federal tax estimates four times per year and remit both the employer and employee taxes
  • Prepare your year-end summaries to state tax agencies
  • Prepare Form W-2 and distribute to your employee (and any former employees who had wages during that calendar year)
  • Prepare Form W-3 and file with the Social Security Administration (along with Form W-2 Copy A)
  • Prepare Schedule H which will accompany your personal federal income tax return
  • Respond to IRS and state requests/inquiries on your behalf
  • Monitor ever-changing household employment tax law and alert you as needed

For more information on Breedlove's No-Work, No-Worry service, watch this brief video.

Good News! Tax Breaks for Dependent Care Expenses

Household employers with dependent care expenses are entitled to tax breaks – regardless of their income level – as long as both spouses are employed, looking for employment, or a full-time student. For most families, the tax breaks offset most

– if not all – of the employer tax costs. In some cases, families even come out ahead by paying legally!

There are two tax breaks available to household employers who pay legally:

  • Dependent Care Account (also commonly called a Flexible Spending Account). Most businesses allow their employees to contribute up to $5,000 of their pre-tax earnings to a Dependent Care Account to help pay for childcare expenses. This means there is no federal income tax, state income tax or FICA taxes on that $5,000 of your income. Depending on your tax bracket, this deduction will save you about $2,100-$2,300 per year which will offset – sometimes exceed – your employer tax liability. Companies have considerable leeway in how these accounts are administered; check with your company's HR department or Accounting department to learn about your enrollment options. Once set up, we can provide you with the paperwork you'll need to take advantage of this tax break.
  • Child Care Tax Credit. If you don't have access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your personal federal income tax return at year end. This tax credit saves $600 for families with one dependent or $1,200 for families with two or more dependents.

IF YOU HAVE 2 OR MORE DEPENDENTS: Please note that the government allows families with 2 or more dependents to itemize up to $6,000 of dependent care expenses. Therefore, if you use $5,000 for your Dependent Care Account, you may have an additional $1,000 in excess expenses that can be claimed on Form 2441, which will save you an additional $200 per year off your tax bill.

There may be some additional tax breaks and employment laws based on your specific situation and your state and local laws. It pays to call Breedlove & Associates for a quick phone consultation (there is no obligation, no pressure and no charge to clients). The toll free # is 888-273-3356 and they are available M-F 8am – 6pm Central Time.

Category: Taxes

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