Nanny Taxes 101

Guest post by OMC member Jillian Plank. Jillian is a CPA and founder of Nanny Files, an affordable guided DIY alternative to traditional nanny payroll services. When she’s not helping parents with their taxes, she’s hiking, cooking, or singing with her husband, three kids, and two dogs just outside of Portland, OR.

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Nanny Taxes Made Simple: A CPA Mom’s Straightforward Guide

It was 2014, maternity leave was winding down, and I was seriously procrastinating locking down childcare for my first baby. The whole prospect of finding someone with the right level of experience, warmth, and calm was downright overwhelming. 

The level of energy it took to find the right person was significant and surprising to me (though, as a brand new mom, I remember everything feeling, just, hard) – but we actually found a lovely nanny relatively quickly and had her lined up to start with 2 weeks left of my leave.

It wasn’t until a few days before her start date that I started searching for a nanny contract template – and started seeing all this information about nanny taxes and the seriousness of not paying them. 

Wait, WHAT? I was about to pay someone one-third of my salary to watch my baby and now I have to pay taxes and pay someone to pay and file those taxes? Why didn’t I know about this? Did I mention that I’m a CPA? Apparently, they don’t teach you this stuff in Masters-level tax courses…

The ensuing Google searches lasted hours. Do I really have to pay nanny taxes? What actually are they? How do I get started? What does this mean for my budget?

Over the years, and after paying multiple nannies in many states (we move a lot), I’ve learned pretty much everything there is to know about nanny taxes and have distilled that down into what really matters to new parents, so you don’t have to spend your last days of maternity leave frantically Googling whether or not you have to pay for workers’ compensation insurance when your nanny starts on Monday (don’t worry – odds are you don’t have to).

Let’s jump into the basics.

What are nanny taxes?

Otherwise known as household employment taxes, these are taxes you pay as the legitimate employer of another person. They typically include the employer portion of Social Security and Medicare taxes, state and federal unemployment taxes, and other state and local benefit taxes, depending on where you live. If you’re looking for the nitty gritty details like specific tax rates, I wrote a post with everything (I mean, everything) you need to know.

Do I have to pay them?

Chances are, if you pay someone to watch your kids on a regular basis, you’ll owe nanny taxes. In 2021, if you pay someone $2,300 (or $1,000 in one calendar quarter) you are considered an employer for tax purposes and you take on the responsibility of being someone’s boss.

Why do nanny taxes matter?

Good question. Paying taxes mostly feels like a burden – but I try to look at this from my nanny’s perspective. If I want my nanny to treat this position as a real job, with all the professionalism it requires, then I need to treat it as a real job as well. My nanny gets proof of employment (important when applying for jobs, apartments, mortgages, credit cards, etc.), unemployment benefits if something unforeseen happens (like, maybe a global pandemic), and credit towards Social Security retirement benefits in the future. 

As the employer, when you pay above board you can also take advantage of tax credits and employer-sponsored dependent care flexible spending accounts to offset the cost of employment taxes. 

What happens if I decide to pay my nanny under the table?

Well, besides your nanny foregoing all the benefits above, it can be a risky move. If the IRS takes a look at your taxes for any other silly reason, this could come up in an audit and can carry hefty penalties and interest on unpaid taxes. In addition, if you carry any sort of professional license or credential, that can be revoked for breaking the law (and not paying taxes = breaking the law). It’s just not worth it.

Ok, what do I do now?

To get started with nanny taxes, I recommend getting a handle on how it impacts your childcare budget. I created a free budgeting tool that lets you play around with hourly rates and will calculate the true cost of hiring a nanny based on where you live. If your idea of relaxing is watching Netflix while entering numbers into spreadsheets, you can also build out an entire annual budget for your family to see how childcare costs fit into it (all in the template).

You’ll also need to figure out a way to calculate and track taxes due to your state and to the IRS. There are full-service companies that will take care of this for you for about $1,200 for the year (see my post on nanny tax services for every budget). I also have a guided DIY service that will walk you through everything you need to do – complete with pictures, videos, and support – if you want to save a little cash on your nanny payroll and tax prep.

I applaud you in taking the first step and learning about paying your nanny above board. I’ve made it my business to help parents navigate the requirements of hiring childcare providers, so please feel free to reach out if you need guidance. I’ve been there (still here, actually – my nanny is with my three children right now) and I’m so happy to be supporting you in your parenting journey.              

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