Many nannies work a series of short term assignments throughout the year. These can range from several days to several months. Examples include nannies that cover for a full time nanny's vacation, step in to help when the regular family caregiver is ill or unavailable, or to fill in between full time nannies when the family is recruiting.
Families and temporary nannies are often confused about their responsibilities and how to handle the wages paid to the temporary nanny from a payroll and tax perspective. The following addresses frequently asked questions regarding temporary nannies and the nanny tax.
What taxes are due on the temporary nanny's wages?
The family and nanny pay employment taxes when the temporary nanny is paid $2100 or more by the family in the calendar year. This $2100 threshold is subject to annual adjustment for inflation.
Employment taxes include Social Security and Medicare, as well as Federal and state unemployment taxes. The family is entitled to deduct 7.65% from the nanny's pay to fund her share of the employment taxes; however, if the family fails to make this deduction the family remains on the hook to pay these taxes to the IRS. The family may be responsible for unemployment taxes, even if the wages never reach $2100.
The nanny is responsible to report all wages and pay her income taxes, regardless of whether employment taxes were due. When she is paid $2100 or more from a family, she is entitled to a Form W-2 at year end for tax reporting. She is responsible to track and report other, smaller amounts received from families throughout the year.
When should a family deduct the employment taxes?
Often the duration of the employment is not predictable. If the family believes there is any possibility that they will pay the temporary nanny $2100 or more they should begin making the deductions for the nanny's Social Security and Medicare starting with the first payroll. If the situation ends before this threshold is met, the family is responsible to refund these amounts deducted with the last wage payment. Both the family and the temporary nanny should keep careful wage records to avoid disputes.
How does the temporary nanny report income when she doesn't receive a Form W-2?
The income from temporary nanny assignments is wage income, regardless of whether employment taxes were due or whether a Form W-2 was issued. Therefore the IRS instructs the temporary nanny to include all wage income - with or without a W-2 - on Line 1, Wages, Salaries and Tips on the annual income tax return - whether you file a 1040 EZ or long form.
Do not report this as Schedule C self employment income - if you do so you will become liable for self employment taxes - which will add an extra 15.3% of your gross wages to your tax bill!
What else should we know about nanny taxes for the temporary nanny?
All employers, including families with a temporary nanny, should collect the nanny's full legal name, permanent address and Social Security Number at the time of hire, and certainly before the first wage payment is made. This information is needed by the family for:
- Form W-2 and employment tax reporting;
- Child and Dependent Care Tax Credit;
- Reimbursement from a Flexible Payment Arrangement for care expenses.