To legally hire a nanny, you need to verify work eligibility, pay Social Security taxes for them, and keep track of their tax deductions, medical benefits, and other insurance. Preparation, in the beginning, will cause fewer complications down the road.
Risks
In the event of an audit - If you are audited, and they find that you have not paid household employee taxes, you not only risk tax penalties but possibly criminal penalties. Doctors can lose licenses, and attorneys can get disbarred.
Unemployment benefits - When you no longer need your nanny's services and they cannot find a new job, they are eligible to file for unemployment benefits and will need to report estimated earnings from the previous employer.
Social Security Claims - There is no statute of limitations on failure to pay nanny taxes. Your nanny could file for Social Security benefits (including disability benefits) and need to give a record of her work history. You will have to reconstruct her employment history and pay both your and the nanny's portion of the taxes, with additional penalties.
Tax Benefits
Dependent care FSA can pay for nanny expenses. Please note that both spouses have to have earned income in order to be eligible for dependent care FSA.
- Dependent Care Flex-Spending Account – You can contribute
$2,500.00 per year if you are married and file a separate tax return.
$5,000.00 per year if you are married and file a joint tax return or if you file as single or head of household.1 - Child Care Tax Credit – (If qualified) Up to $2,000 for one child in 2024, for tax returns filed in 2025, and the same amount in 2025, for tax returns filed in 2026.
There is also the Additional Child Tax Credit (ACTC), which is refundable. The ACTC is worth up to $1,700 per child in 2024 and 2025.2
Tax Rates For Employee and Employer
Employee - You will be deducting 7.65% for Social Security and Medicare from your nanny's income.
Employer - You will be paying 7.65% for Social Security and Medicare on your nanny's income.
Federal Unemployment Tax (FUTA) - There is also a FUTA tax you will need to pay that is 6.0% of the first $7,000 you paid to each employee as wages during the year. The FUTA tax rate after credit can reduce this to 0.6% if you're entitled to the maximum 5.4% credit.3
Setting Up Nanny Payroll
Companies - These companies have a payroll service specifically for nannies:
- GTM Payroll Services
- SurePayroll
Worker's Comp & Disability
In NY and NJ, you are only required to have this insurance if your nanny works 40 hours/week or more.
These are just a few items the help address your household employee issues. Be sure to consult your Lenox Advisor, tax and legal professionals to ensure you make the best choices for your unique situation.
1fsafeds.gov/explore/dcfsa 2bankrate.com/taxes/child-tax-credit-what-to-know/ 3irs.gov/taxtopics/tc756
The information provided is not written or intended as specific tax or legal advice. Lenox Advisors. In., its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
CRN202709-7547085
