Tax Requirements and Recommendations When Hiring A Nanny

If you hire a nanny, in order to satisfy the IRS and stay a happy law abiding citizen it is important to assume the role of an employer and pay employment taxes (Social Security, Medicare, etc.), report payroll withholdings (taxes, insurance benefits and so on) and of course, make sure that she is legally able to work in the US.

Listed below is a list of quick steps to get started to help you with your taxes if you get a Nanny: 

Obtain state and federal Employer identification Numbers (EIN). 

You can obtain a federal EIN on the internet instantly or you can download the SS-4 form and mail it, or contact the IRS.  To get your state EIN, you will need to contact your state government. 

Verify Work Eligibility 

To verify work eligibility in the United States, you will have to complete form I-9 and follow the U.S. Citizenship and Immigration Services Office's procedures. 

Setup Payroll and Withholding Tracking 

You must keep track of the amounts that you pay your nanny and also the amounts that you withhold from her pay.  You aren't required to withhold federal income tax, but your nanny must pay federal taxes depending on her income.  You might want to withhold however to save your nanny time and possible IRS fines for tax underpayment.  If you decide to withhold, you are required to have your nanny complete a W-4 form which you will have to keep in your records.  You will use the information given on the W-4 form to calculate the federal withholding amounts.  Occasionally (normally at the end of every quarter) you will need to pay to the IRS the amounts you have withheld as well as file a form 1040ES.  

If you pay your nanny an amount higher than $1700 (for tax year 2010), you are required to pay social security and Medicare tax.  The amount you have to pay is about 15.3% of nanny's gross wages.  You can pay the full amount yourself, or you can deduct 50% from the amount of your nanny's wages.  You'll pay these taxes on a quarterly basis and at the end of the year you will file Schedule H to report the amounts.   

End of Year Tax Reporting 

At the end of every year, you will have to report the wages you have paid and any withholding amounts.  In most cases you are going to file a Schedule H together with your regular 1040 tax return. 

You must provide your nanny with a W-2 form with the details of her gross wages and all of the withholdings and deductions for the year.  You are required to provide your nanny with her W-2 by January 31st and you will need to report the wage information to the IRS by February 28th by using a form W-3. 

Alternatives 

If instead you would like to spend time enjoying your free time and let somebody else manage your tax payment and filing requirements, there are many companies that offer the service to nanny employers. 

Disclaimer 

We are not tax professionals and the information provided in here is intended to help you perform your own due diligence and research related to employing a nanny.  As with all tax matters, we recommend that you consult a professional tax advisor or Certified Public Accountant.