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Household Employers - Money You Pay for Nanny Health Insurance May Qualify Towards a Tax Credit

Posted by Kathy Webb on 4/29/13 11:28 AM

We know, you just finished your annual tax filings and you would really prefer to tune out! This, however, is good news we want to remind you about.

Tax Credit for Nanny Health Insurance

The Small Business Health Care Tax Credit, which covers 2010 - 2013, applies to household employers too!

IF you provide health insurance for your household employees (nanny, housekeeper, senior caregiver) AND you:

  • Employ 25 or fewer full time employees (or full time equivalents)
  • Wages average less than $50,000 per employee annually
  • Provide health insurance and pay at least 50% of the employee’s single-rate premium

You may be eligible for the Small Business Health Care Tax Credit. Household employers may not deduct employee health insurance premiums from their income taxes the way other business employers can, making this the only tax reduction option available to the household employer.

The household employer needs to be aware of some "fine print."  For example you must pay the employee's insurance premium directly to the health insurer - you cannot give this money to your nanny or housekeeper to pay themselves.

Employer provided health insurance benefits remain non-taxable compensation, exempt from employer FICA and unemployment taxes, and exempt from employee FICA and income taxes.

Here is an example of the Small Business Health Care Tax Credit:

The Smith family employs one nanny who earns $25,000 per year. They pay $250 monthly for a qualified health insurance plan ($3000/year). The Smith family qualifies for a maximum credit of 35% of the premium, or $1,050.

The maximum credit can be reduced by several factors, including when average annual wages exceed $25,000 and in situations where your state offers either a tax credit or premium subsidy to household employers who offer health insurance to their employees. To claim the credit, the Smiths must include IRS Form 8941 with their annual income tax return.

Topics: nanny health insurance

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