Expert Insights: Nanny Employer Tax Facts with Guy Maddalone of GTM Payroll Services

by Michelle LaRowe
Editor in Chief

When it comes to tax responsibilities for nannies and employers, separating fact from fiction can be hard. Enter Guy Maddalone of GTM Payroll Services, who is here  to set the record straight and answer some of the most common questions nannies and parents face.

eNannySource: What are a nanny employer’s legal tax responsibilities?

Guy: If an employer pays cash wages of $1,800 (2013) or more to their household employee, they 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 an employer pays a total of $1,000 (2013) or more per quarter to a household employee, then they must pay federal unemployment tax.

eNannySource: What are the risks of non-compliance?

Guy: 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 and 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.

eNannySource: How can an employer become compliant?

Guy: The first step in becoming compliant is to understand the tax, wage and labor laws regarding household employment and what you are responsible for. As an example, employers pay Social Security, Medicare, unemployment insurance and may be required to have a workers compensation policy for their household employee. They must also pay at least minimum wage and overtime, in most cases, to employees who work more than 40 hours per week, or in some states more than eight hours per day. It is important for household employers to understand their specific state laws, as some states have laws protecting domestic workers and requirements that need to be followed. Since dealing with taxes, wages and insurance is often time-consuming and complicated, many household employers choose to use the services of a professional payroll service, such as GTM’s EasyPay®, that can give you a free tax, wage, labor and insurance consultation and provide you with the steps you need to take to become compliant.

eNannySource: What is the typical nanny employer tax liability?

Guy: Rates differ based on the state in which a family employs a nanny, however GTM estimates that employers can expect to pay nine to 12% of the employee’s gross pay for federal unemployment insurance, Social Security, Medicare, state unemployment insurance and other state and local taxes. Based on the amount of their wages, employees can expect to pay 10-30% of their gross pay for Social Security and Medicare, federal and state income taxes, and other state and local taxes. For more information, use GTM’s free Nanny Tax Calculator.

eNannySource: What if the nanny agrees to be paid under the table?

Guy: This is dangerous and against the law. Nannies can face IRS penalties due to failure to file income taxes. As a practical matter, a nanny who accepts wages “under the table” will not have any unemployment insurance benefits if they become involuntarily unemployed, workers compensation if they get hurt or sick on the job or a legal employment history and credit history if they are trying to establish credit to buy a car or a home. Also, since they do not make contributions to Social Security or Medicare, they will not be eligible for these benefits when they retire. It is a good idea to create a work agreement in order to document the requirements of the position and establish a clear understanding between employer and employee of what is expected, how much they will be paid, when they will be paid and the manner in which they will be paid.

Guy Maddalone, Founder and CEO of GTM Payroll Services Inc., is a 25 year veteran of the payroll, human resource and employment services industry. Originally starting with the placement of home healthcare and eldercare personnel, he expanded his business to include nannies and other household staff. In 1991, he founded GTM Payroll Services to provide payroll & tax administration for households, the first in the industry. Guy is a household employer himself and the author of How to Hire a Nanny: A Household HR Handbook – Your Complete Guide to Finding, Hiring, and Retaining a Nanny and other Household Help (SPHINX LEGAL). He is widely-recognized as the nation’s household employment expert and believes in sharing his personal and professional industry knowledge with the employment community.