Nanny taxes are a mystery to most people. This is because they are complicated and require navigating the IRS regulations, State laws and, in some cases, local municipality requirements. With the demands of children, work and life, most parents and nannies don’t have time to become a tax expert. So, we thought we’d boil it down for you.
The IRS considers the family-nanny relationship one of employer-employee, not independent contractor. This is important, because employers are required to “withhold” taxes from payments to their employees, to submit those taxes and to file various forms and paperwork. So, if a family pays a nanny more than $2,000 (for 2016) a year, then the family must comply with the nanny tax requirements.
Unfortunately, nanny taxes are not so simple. In fact, the IRS estimates that it takes a family 60 hours of work each year to comply with nanny taxes. The alternative is even worse, as not complying with nanny taxes is considered tax evasion and can subject both the nanny and the family to severe penalties.
Some things to consider before you decide to ignore the law:
According to the IRS, a household with an income of more than $200,000 has a 1 in 34 chance of been audited. Evading nanny taxes can result in criminal charges or steep penalties and fines, with the average IRS charge around $25,000.
A family can actually achieve tax savings by complying. Yes--you read that right. The average cost of complying with the law will add an extra 10% to the cost of having a nanny; however, through a Dependent Care reimbursement accounts offered by your employer, and/or the Child Care Tax Credit you can achieve significant tax savings. These tax breaks can offset the majority of the additional 10%, and in some cases even exceed the additional cost.
It is the right thing to do. Paying legally provides a nanny with all the benefits that other employees enjoy like Social Security income, Medicare, disability and unemployment. It also enables a nanny to build a credit history so she can qualify for a car loan or mortgage. Lastly, providing benefits and complying with the law cultivates a professional and trusting relationship.
So how do you comply without spending 60 hours a year pulling out your hair? Poppins Payroll offers a trusted, affordable and easy to use nanny tax and payroll service for families. The service even offers completely free direct deposit.
The sign up is easy and they offer a 24/7 dashboard where you can adjust payroll, print off paystubs and see your historical payroll and tax information. You also get piece of mind knowing that all of your tax liabilities are handled by household tax professionals, with guaranteed accuracy and 100% compliance. And at a price of only $39/month, that is money well spent.