Everything You Need To Know About How To Pay A Nanny
This guide addresses many of the questions you may have about hiring a household employee, including how to pay a nanny legally and how much to pay a nanny.
If you’ve never paid a household employee before, you may be confused as to how to pay a nanny. Fortunately, paying your nanny the legal way is pretty simple.
In this post, we’ll show you how to put your nanny on the books. We’ll cover everything from paying your nanny a fair wage to discussing nanny taxes and if you have to pay them. We’ll then walk through the process of issuing payment, filing taxes, and everything in between. Keep reading to learn more about paying your nanny.
Table of Contents
What Are Nanny Taxes & Do I Have To Pay Them?
In most cases, a nanny is considered a household employee. According to the IRS, a household employee is:
- Someone that performs services in or around your home
- Someone that works for you, and you control what work they do and how it is done
If your nanny is a household employee, you will typically have to pay nanny taxes. These taxes include social security and Medicare taxes (FICA), and Federal Unemployment Taxes (FUTA).
For 2022, households that pay a household employee $2,400 or more during the year will be required to withhold and pay social security and Medicare taxes. These taxes are equal to 15.3% of cash wages and are split evenly between you (the employer) and your nanny.
Household employers that pay an employee $1,000 or more in a calendar quarter will be required to pay FUTA tax. You may also be required to pay state unemployment taxes. FUTA tax is 6% of cash wages. This applies to the first $7,000 in wages earned during the calendar year.
There are some rare instances where you are not required to pay nanny taxes. You aren’t required to pay nanny taxes if your nanny is:
- Your spouse
- Your child that is under the age of 21
- An employee under the age of 18 that does not provide nanny services as their principal occupation
- An employee under the age of 18 that is a student
If your parent is caring for your child, you are not required to pay nanny taxes if both of the following conditions are met:
- Your child is under the age of 18 OR has a physical or mental condition that requires care for at least four consecutive weeks in a calendar quarter, AND
- You’re divorced and haven’t remarried, you’re a widow/widower, or your spouse has a physical or mental condition that prevents them from caring for the child for at least four consecutive weeks in a calendar quarter
The Benefits Of Paying A Nanny Legally
The extra time and expense associated with paying a nanny may seem like a burden, but taking the time to do things legally also offers several benefits to you as a household employer. Here’s why you should pay your nanny the legal way.
Avoid Hefty Penalties
The IRS makes it clear that most household employers are required to pay payroll taxes on their household employees. Failure to do so may result in tax penalties and interest that could cost you thousands of dollars, in addition to paying the taxes that are owed.
Additionally, paying your nanny under the table could result in labor law violations that result in additional financial penalties and potential legal issues. For example, failure to pay overtime wages or not purchasing workman’s comp insurance could lead to costly legal battles. This can be avoided by following the laws when it comes to paying your nanny.
Benefits For Your Nanny
Paying your nanny legally offers benefits to your household help. As an employee, your nanny will be able to receive benefits including unemployment, Medicare, and Social Security in the future. Additionally, withholding payroll taxes from your nanny’s paychecks will prevent them from having to deal with the hassles of filing as a self-employed individual — and can potentially help them avoid a big tax bill come April.
Tax Benefits For You
As a household employer, you may be able to claim tax credits and deductions to help offset your income taxes. For example, the Child and Dependent Care Tax Credit can be applied to your nanny’s wages, giving you a tax break of up to $1,200. If you’re enrolled in a Dependent Care Account, you can save up to approximately $2,000 on your taxes.
Do I Need An EIN Number To Pay A Nanny?
According to the IRS: “Anyone who performs services for you is your employee if you can control what will be done and how it will be done.” Since you will be paying, setting hours for, and overseeing the responsibilities of your nanny, he or she is considered a household employee.
As an employer, there are specific tax requirements that now apply to you. For tax administration purposes, you will need an Employer Identification Number (EIN).
Fortunately, applying for and receiving an EIN on the IRS website takes just a few minutes.
Simply set your legal structure as a sole proprietor, select household employer, and then enter personal information including your legal name and SSN or ITIN. Add your physical address and a mailing address, followed by your state, county, and hire date.
Finally, you will select whether you want to receive your EIN instantly via email or by mail, which can take up to four weeks to receive.
How To Pay A Nanny In 10 Steps
Once you’ve hired your nanny, it’s time to figure out how to pay them properly. This ensures they get compensated for their hard work, while also making sure you follow labor and tax laws. Here’s how to pay a nanny in ten easy steps.
Step #1: Get An EIN Number
You can apply for an EIN directly through the IRS website. The online application is quick and easy. You will need to provide information to the IRS including your legal structure (in most cases, you will select Sole Proprietor, then Household Employer), your legal name, Social Security Number, and address. Once your application is submitted and approved, you have the option to receive your EIN online immediately.
Step #2: Report Your New Hire
After you hire your nanny, you will need to report this new hire to state authorities. This information is used by the state for child support enforcement, as well as fraud control for state welfare programs.
The timelines for reporting vary by state and range from 5 to 35 days, although most states require you to report within 20 days of hiring your household employee. At a minimum, you generally need to submit a W-4 to your appropriate state agency. However, some states require additional information, including your employee’s date of birth, the date of hire, and a state unemployment account number.
Step #3: Determine Your Nanny’s Salary
Do a little research online to get an idea of the average salary in your area. Next, consider other factors that may affect your nanny’s pay, including the number of children the nanny will be responsible for and the nanny’s level of experience. We’ll explore this further later in this post.
Step #4: Send Your Nanny A W-4 Form
Your nanny will need to fill out a Form W-4, Employee’s Withholding Certificate. This form can be downloaded from the IRS website and requires your nanny to provide their name, address, Social Security Number, filing status, dependents, adjustments, and a signature. Once completed, the nanny will return the form to you, and you will use this to accurately calculate and withhold federal taxes.
Additionally, your nanny should also fill out Form I-9, Employment Eligibility Verification. This form can be obtained from the U.S. Citizenship and Immigration Services website. This form is used to verify the identity and employment authorization of your nanny. Your nanny will attest to their employment authorization, and you must also complete a section attesting that you have verified their employment eligibility. This form does not need to be submitted to the IRS or USCIS, but you must have it completed and in your possession prior to your nanny’s first day of work.
Step #5: Track Hours Or Calculate Salary Wages For The Month
Many households opt to pay their nannies monthly, so you will need to calculate salary wages or track hours for the month in order to pay your household employee.
If your nanny is salaried (meaning that they receive a fixed amount of money regardless of hours worked), this calculation is easy. Simply divide your nanny’s total annual salary by 12. This will equal the nanny’s gross monthly wages before federal and state taxes are withheld. If your nanny’s salary is $42,000 per year, divide this number by 12 to determine that the monthly gross salary is $3,500.
If you are paying your nanny by the hour, the calculations can be a little bit trickier. Fortunately, there are numerous free and paid time tracking software and apps that allow you to easily keep up with the hours your nanny has worked. Once you’ve tracked your nanny’s hours, simply add up the hours for the month, and then multiply that number by the hourly rate of pay. For instance, if your nanny makes $15 per hour and worked a total of 162.5 hours for the month, multiplying these numbers together gives you $2,437.50 — the nanny’s gross monthly wages.
Of course, you may opt to pay your nanny on a different schedule, such as weekly or twice per month. In those cases, make sure to adjust your calculations as needed. One last thing to note is that you should also make sure to check your state regulations regarding frequency of pay to ensure you’re following labor laws in your area.
Step #6: Withhold Federal & State Taxes
When calculating your nanny’s paycheck, you need to ensure that federal and state taxes are withheld from each check. This includes:
- Employee’s share of social security taxes (6.2% of cash wages)
- Employee’s share of Medicare taxes (1.45% of cash wages)
Your nanny may also request you to withhold federal income taxes. If you agree to this and have a W-4 completed by the nanny, you may proceed to withhold these taxes. It will then be your responsibility to pay these taxes to the IRS. This agreement can be terminated if either party puts it in writing. If you do withhold federal income taxes, you can determine the withholding amount by using the information provided on the W-4 and the tax tables found in IRS Publication 15-T, Federal Income Tax Withholding Methods.
Still scratching your head when it comes to payroll taxes? Find out everything you need to know before you cut your first paycheck with The Ultimate Payroll Taxes Guide For Small Businesses.
Step #7: Pay Your Nanny’s Paycheck
After calculating your nanny’s wages and deducting federal and state taxes, you will need to issue your nanny a paycheck. The paycheck and paystub should include several key pieces of information, including:
- Your nanny’s legal name and address
- Your legal name and address
- Gross wages
- Net pay
The easiest way to create a paycheck and paystubs is with payroll software. This software not only simplifies paying your household employee, but it also can even tackle complicated tax calculations, allow you to direct deposit your nanny’s pay, track hours, and more.
Step #8: Pay Your Payroll Taxes & Complete Year-End Tax Forms
Remember those tax deductions you withheld from your nanny’s paychecks? It is your responsibility to ensure that these payments make it to the IRS. Additionally, you will have to also pay taxes from your own pocket. This includes:
- Your share of social security taxes (6.2% of cash wages
- Your share of Medicare taxes (1.45% of cash wages)
- FUTA taxes (6% of wages for the first $7,000 earned in a calendar year)
To avoid underpayment penalties, many household employers file IRS Form 1040-ES, Estimated Tax for Individuals. This form is filed along with payroll tax payments each quarter. You may also be required to file state taxes on a quarterly basis, but this varies by state.
In addition to quarterly tax filings and payments, you will have year-end tax forms to complete. This includes sending a copy of Form W-2 to your nanny on or before January 31, as well as submitting a copy to the IRS. When you file your annual tax return due in April, you will also need to fill out and submit Form W-3, Transmittal of Wage and Tax Statements, as well as Schedule H, Household Employment Taxes.
Tax time can be confusing for new household employers. Stay on track for tax season with our year-end payroll checklist.
Step #9: Keep Careful Payroll Records
If your household employs a nanny, it’s important to keep careful payroll records. Keeping payroll records is essential in the event of an IRS audit. It’s also useful in helping you keep track of your expenses and can even be used when planning for your nanny’s next raise.
Most importantly, though, keeping payroll records is the law. Under the Fair Labor Standards Act, you are required to keep payroll records for a minimum of three years. For some records, such as tax returns, you may be required to hold onto them even longer. Learn about how long you should keep payroll records for more information.
Step #10: Don’t Forget About Payroll Deductions
In some circumstances, you may have additional payroll deductions to take from your nanny’s paycheck. In addition to federal and state taxes, there are other mandatory deductions that may apply, including garnishments for unpaid child support or unpaid debt. You will receive notification regarding these deductions, including how much to withhold and where to submit payments.
Wondering How Much Should You Pay A Nanny?
According to Care.com, the average wage for a nanny in 2022 is $15.30 per hour. However, this number may be higher or lower based on where you live. In cities where the cost of living is much higher, nanny salaries may average $20 or more per hour.
Other factors should be considered when determining how much to pay a nanny. This includes the number of children that will be cared for, your nanny’s experience level, CPR or first aid certifications, and additional household responsibilities, such as housekeeping or running errands.
The Bottom Line On How To Pay A Nanny On The Books
Paying a nanny legally is the best way to make sure you’re complying with tax and labor laws and regulations. This helps prevent you from being penalized for failure to pay taxes on your employee as required. Additionally, paying your nanny the right way offers advantages to them — such as unemployment benefits — and helps ensure they get paid on time, every time.
If you’re new to payroll or paying a household employee, don’t worry — there are plenty of resources available to help make sure you get it right. Cut out the guesswork by checking out our picks for the best nanny payroll software. Nanny payroll software offers loads of benefits, from time tracking and tax calculations to storing crucial payroll records and making sure you file and pay your taxes on time to avoid hefty penalties and interest.