As a household employer, do I have to pay taxes on my employee?Answer – Yes. As a household employer, if you
pay cash wages of $2,000 (2016) or more to your employee, you must
withhold Social Security and Medicare taxes. Employers are not required to withhold
Federal and State income taxes unless it is agreed upon by both parties. If
income taxes are not withheld throughout the year, your nanny will be
responsible for paying them at the end of the year. If you pay a total of
$1,000 (2016) or more per quarter to a household employee you must pay federal
My friends pay their employees off the books. Can I?
According to IRS Publication 926, employers must withhold taxes if their
employee earns $2,000 (2016) Gross. It is each individual employer’s
responsibility to withhold taxes according to this. GTM strongly recommends
that you review the tax laws regarding household employment.
What are the risks of non-compliance?
By not paying payroll taxes, the employer risks being investigated by the IRS
which could result in hefty fines of $25,000-$100,000, penalties, and
potential jail time. They will also be responsible for the payment of all back
employment taxes, interest, penalties, and will not be eligible for tax
breaks like the Dependent Care Assistance Program or the Child Tax Credit.
Additionally, if you are in a state that requires workers’ compensation
insurance and you do not pay taxes, you cannot obtain the insurance and as
a result, if your nanny becomes injured on the job you could be
responsible for her lost wages and medical expenses. Paying taxes for your
household employee allows you to take advantage of a flexible-spending plan by
using their salary as a qualifying expense.
Can I treat my household employee as an independent contractor?
No. There are specific differences between an employee and an independent
contractor. An employee is a person who takes instruction from the employer,
has a schedule set by the employer, and uses tools and equipment provided
by the employer. An independent contractor is a person who works under their
own conditions, sets their own schedule, and uses their own supplies. Most
nannies who work in an employer’s home, whether it be on a temporary or
full-time basis, are considered household employees, not independent
contractors, because they work under the family’s control and have their
schedule and pay set by the family. In the past, the IRS has made
determinations that caregivers are considered employees and it is illegal for a
family to treat them as independent contractors.
I own a business. Can I put my household employee on my payroll?
No, it is illegal to pay your household employee on your business payroll. A
household employee is an employee in your home, not your business and therefore
would not qualify you to take the tax deductions which you would be allowed to
take with a traditional business employee.In most cases, federal household
employment taxes must be paid on the employer’s personal federal income tax
return, either annually or quarterly. The only exception to reporting
federal household employment taxes on the employer’s personal federal income
tax return is if they are a sole proprietor or if their home is on a farm
operated for profit. In either of these cases, the employer may opt to
include federal household employment taxes with their federal employment tax
deposits or other payments for the business or farm employees. For more
information, refer to IRS Publication 926.
Should I talk to my employee in terms of Gross pay or Net pay?
It’s always best to talk in terms of Gross pay for several reasons:
employer taxes are based on top of the gross wages, making budgeting
tables change on average once a year, so there is no guarantee that the
net that you agree on with the employee will remain the same
it is less costly for you to speak in terms of gross pay because your employee’s
taxes are deducted from the gross wages rather than being added on top of
Can you explain the specifics of a nanny share?
We highly recommend creating a work agreement in order to document the
requirements of the position. A work agreement establishes a clear
understanding between the employer and employee regarding the employee’s duties
and responsibilities, and all that is expected from both. Lack of a work
agreement can contribute to confusion, dissatisfaction, and a high turnover
rate. For more information, refer to How to Hire a
Nanny by Guy Maddalone.
What if my employee cannot provide documents for the I-9 form?
As the employer, it is your responsibility to provide an I-9 form to your
employee within 3 days of hiring. It is also your responsibility to review the
documents received from your employee to ensure they are valid and not expired.
If your employee is unable to provide the documents needed to support the proof
of their work authorization legally, you should not hire them. If you are
unsure of the eligibility of your employee, you can always verify the
information they have provided using the E-Verify program at www.uscis.gov.
Am I required to pay overtime?
According to the U.S. Department of Labor, the federal Fair Labor Standards Act
(FLSA) requires employers to pay overtime pay of one and a half times the
regular pay rate. Overtime pay must be paid for work over 40 hours per
week. However, some live-in nannies are exempt from overtime depending on the
state in which they are employed. Employees hired to provide baby-sitting
services on a casual basis, or to provide companionship services for those who
cannot care for themselves because of age or infirmity, are exempt from the
FLSA’s minimum wage and overtime requirements, whether or not they reside in
the household where they are employed. State and local laws for overtime vary
and may supersede the federal FLSA law. Consult a certified professional at GTM
for more information by calling (888)432-7972, or contact your state’s
Department of Labor for your state’s specific laws. A household employer
should specify in the work agreement when approved overtime can occur and what
the specific rate of pay will be to avoid conflict when the issue arises. Click here to estimate
these costs using GTM’s Overtime Rate Calculator.
Am I required to provide vacation or other paid time off to my
While vacation and other paid time off is not a requirement, it is a popular
benefit provided to household employees and is a major contributor to job
satisfaction, according to many nannies. All time off payments should be agreed
upon by the employer and employee prior to hiring, and should be clearly
defined in both the work agreement and employee handbook.
Do I have to provide worker's compensation insurance?
Most states require household employers to carry a workers’ compensation policy
depending on whether your employee works part-time or full-time. This type of
policy will provide compensation to an employee who is injured on the job. Even
if your state does not require it, GTM strongly advises you to obtain coverage
for your employee. GTM Employment Benefits, LLC is a licensed insurance
brokerage that specializes in setting up workers’ compensation policies for
household employers. Contact GTM Employment Benefits at (800) 432-7972 x 7213 to explore your options and see if GTM
can help you in obtaining this policy.
What tax breaks do I receive?
Answer – There are two main tax breaks
that can offset your employer tax costs. If you are legally employing
someone in your home (paying “on the books”), you will be able to take
advantage of one of the two following tax breaks:
1. Dependent Care Assistance Program (DCAP) –
Most companies provide this benefit and allow employees to contribute up to
$5000 of pre-tax earnings to a Dependent Care account. You would then be
reimbursed these tax-free funds to cover childcare expenses.
2. Child and Dependent Care Tax Credit – For
those who don’t have access to a Dependent Care Account, youcan claim the Child and
Dependent Care Tax Credit (Form 2441) on your personal income tax return at
year-end. You can claim up to $3,000 of the un-reimbursed qualifying child care
expenses paid in a year for one qualifying individual, or $6,000 for two or
more qualifying individuals. The credit can be anywhere from 20% to 35% of your