Many household employers are only now beginning to seriously consider the costs and risks related to paying nannies and other household workers “on the books.” In fact, complaince rates hover around 20%. More families are recognizing the merits of filing as employers, and helping household workers with required withholding and tax payment. While filing and paying taxes on household employees brings with it additional costs and paperwork, it also avoids stiff penalties if you are audited by the Internal Revenue Service.
While families are doing the right thing by filing payroll taxes, they’re also wondering how to offset the cost of a nanny. In fact, there are two ways a family can get some tax relief of their own.
- Flexible Spending Accounts: Many companies will offer their employees the ability to fund a pre-tax dependent care account. Using this “flex spend” account, employees can set aside up to $5,000 per year from taxable salary to pay for approved child care costs. Because a flexible spending account has a “use it or lose it” rule applied to it, it is essential for families to calculate exactly how much money they are paying out in child care. Be sure you check the regulations or get help from your accountant to determine what, if any, nanny expenses can be reimbursed through your “flex spend” account.
- The Child and Dependent Care Tax Credit: You can receive up to 20% of your child care costs in the form of a tax credit if your household has children under 13 years old. You must include Form W-10 and Form 2441 with your annual federal tax return in order to receive your credit. Again, your accountant will be able to help you determine if your childcare arrangements are eligible for this credit come April 15th.
HomeWork Solutions has provided turnkey tax and payroll services for family employers of household employees since 1993. We have assisted thousands of clients in the following helpful ways:
- Affordable, turnkey tax and payroll filing
- World-class customer service
- Access to organized tax information for use by your accountant
Feel free to call us with your tax questions, and to learn more about HomeWork Solutions for nannies, elder caregivers, household managers and other domestic employees.
