A year ago, my husband and I were thinking about hiring a nanny for our newborn. Of course, there are the more familiar things to consider when hiring a nanny: references, background check, experience and credentials, and overall personality fit. But I didn’t realize how complicated it could get if you employ a nanny until I started researching. There are three things I suggest discussing with your partner before deciding to hire a nanny: Taxes, Nanny Payroll Service, and Workers’ Compensation Insurance. Now, I realize these are not exciting topics. But you want to make sure you’re addressing these things before you hire a nanny. It’s important to be on the same page and to ensure that the costs are covered in your budget.
If you paid your nanny more than $2,300 in 2021 or paid $1,000 or more during any calendar quarter of 2021, then, most likely you need to pay employment taxes. The IRS has created a table to show the specifics. Publication 926 (2021), Household Employer’s Tax Guide | Internal Revenue Service. Typically, a household employer pays around 10% of the employee’s gross wages in nanny taxes.
Additionally, there are many other steps that you need to take per the IRS, such as obtaining an Employer Identification Number (EIN), giving your nanny their W-2 by January 31st, and filing Schedule H with your 2021 federal income tax return. See table 2 in the above link for more details.
Now, I don’t know about you, but my husband and I were barely able to fit in regular showers, let alone take care of all these items. Additionally, with the lack of sleep, my head was swirling from all of the information. This is where the second consideration comes in.
2. Nanny Payroll Services
There are many companies that complete all of the above items on your behalf. And for us, it was worth every penny. According to this article, The 7 Best Nanny Payroll Services of 2022, the cost can vary between $20-$60 per month depending on the level of service. We paid $45 per month and we were extremely happy with the provider. I highly recommend checking out Poppins Payroll. They don’t operate in every state, but they do in Washington. And as if that’s not enough! Here is the third thing to consider:
3. Workers’ Compensation Insurance
It provides medical and wage benefits for household employees (nannies) who are hurt or become ill on the job. The requirements to carry workers’ compensation insurance varies by state. It typically costs between $70-$120 per month according to this article, 5 Best Nanny Workers’ Comp Insurance Companies – BravoPolicy, and is dependent on many factors. For Washington, it is not required unless you employ two or more household employees. However, it’s a good idea to consider voluntary coverage if you’re not required to have a policy in your state. If you’re already working with a payroll service, check with them to see if they can provide you with coverage.
Now you might be saying to yourself, “Well, I don’t have to worry about these things because I’m paying my nanny under the table.” I would urge you to consider taking the above steps because it can be way more costly if you are audited or if your nanny gets hurt or ill on the job. Additionally, noncompliance can derail any number of job opportunities. If you’re being considered for a partner at your firm or applying for an executive level opening at a large corporation, during the vetting process, they could ask you about paying appropriate taxes for household employees which would include your nanny. It also gives your nanny important benefits like social security, Medicare and unemployment insurance. If you’re in this boat, check with a payroll service, they can help you get things sorted out.
So, if you’re lucky enough to find a nanny these days, make sure you know how you’re going to address taxes, if you’re going to use a payroll service, and if you are required to carry workers’ compensation insurance before you hire them. Knowing this beforehand will save you from additional stress down the road. And, who needs any extra stress on top of having a child during COVID?!
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jessica Kirwin, and all rights are reserved.