Paying a Nanny/Babysitter on the Books

Step-by-step instructions and web links for paying your nanny or other household employee on the books.

 

 Paying a Nanny/Babysitter on the Books- 2014

 

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(NOTE: It's always good to check with a professional about these steps. The fines associated with paying incorrectly and time it takes to resolve are worth the peace of mind that comes with double checking.)

---ARTICLES AND PUBLICATIONS
---FAQS
---SETUP
---ONGOING
---ASSISTANCE
---CHECKLIST FOR PAYING NANNY TAXES

 

1. ARTICLES/PUBLICATIONS

Household Workers Law: Bill of rights sets forth wage and hour obligations of employers. Oct 2011

Doing the Right Thing by Paying the Nanny Tax, NY Times,

New York State Department of Taxation and Finance's Publication #27: "What You Need To Know If You Hire Household Help" (pdf)

Department of Labor's "Labor Rights and Protections for Domestic Workers in New York"

IRS Publication 926: Household Employer's Tax Guide

Domestic Workers' Bill of Rights (which went into effect November, 2010)

Senator Liz Krueger's Guide to Employing a Nanny and Other Full- Time Domestic Workers

Publication NYS-50, Employer’s Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax.

 

2. FREQUENTLY ASKED QUESTIONS

What does it mean to pay a Nanny "on the books"? Paying on the books means that you, as an employer, document your Nanny's wages, pay in federal and state withholding (if your nanny requests it), social security, Medicare and other amounts via regular estimated payments/withholdings. It is illegal to fail to properly document wages and pay taxes on income paid to a Nanny.

Do I need to pay my Nanny on the Books? If you pay your Nanny more than $1800 in a calendar year you need to pay your Nanny on the Books. Generally, the federal employment taxes are added to your personal tax return (annually) while the state taxes are remitted quarterly.

What happens if my Nanny says she doesn't want to be paid on the books?  It's up to you to decide you are not paying on the books, not your Nanny.  The employer (you) are responsible for the fines associated with not paying on the books as well as back taxes, penalities, overtime pay and other expenses- after the fact. Nannies, however, may not understand the short and long term benefits of paying on the books such as Social Security benefits, earned income credits, unemployment, and Medicaid. If you have the best Nanny candidate in the whole wide world you should do what's best for both you and her-- pay her on the books.

Is my Nanny an independent contractor who I can pay with a 1099? Nope, no matter how you try to make an argument for this one, she is a household employee, not an independent contractor. You'll fill out a W-2 (NOT) a 1099.

If my Nanny is undocumented can I still pay her on the books? Without a social security number or ITIN number your Nanny does not have the proper documentation to work legally in the United States but you CAN pay her on the books. However, it's more difficult. If she's trying to get citizenship it can help her case if you pay her taxes.  If you decide NOT to pay on the books since your nanny is undocumented you are still required by law (via the Wage Theft Protection Act) to give them notification of their pay. Also, they are still entitled to at least the minimum wage and time and a half for all hours worked over 40 in a workweek (as designated by the Domestic Workers Bill of Rights - DWBR).

Can I hire my Nanny by paying her a weekly salary?  You may AGREE to a weekly salary but you need to record it as hourly pay. Legally, however, they are NOT a salaried employee that you can pay the same weekly rate for 35 hours one week and 45 hours the next week. You and your nanny may agree on an average but the law doesn't see it that way. Plus, if she works for more than 40 hours you'll need to document it as a regular and overtime rate. Here's the formula for figuring out the hourly rate with an agreed upon weekly salary: Hourly rate = Weekly Total Income/ (40+(1.5*(total hours-40))).

What am I responsible for withholding from each paycheck?

- The employee's Social Security taxes (6.2% of gross wages)

- The employee's Medicare taxes (1.45% of gross wages)

- Federal and state income tax withholding (if requested)

(NOTE: You are not required to withhold federal income tax from wages you pay a household worker.  However, it can be done if the employee requests it and you agree to withhold it. If you do not withhold, you should explain to your nanny that she will owe taxes at tax time (if necessary). In any case, if the Nanny has children she may be eligible for the Earned Income Credit (EIC) and will receive a refund on their federal income taxes.) (You can look at the EIC limits and further information here)

- Disability is required for all employees and workers comp is required if the domestic employee works 40 or more hours per week.

What am I responsible for paying annually?

- Social Security & Medicare taxes representing a total 15.3% of wages consisting of 12.4% Social Security (6.2% withheld from your employee’s paycheck plus the employer's matching 6.2%) and 2.9% Medicare (1.45% withheld from your employee plus the employer's matching 1.45%). NOTE: Traditionally, the employee portion is deducted from the agreed wages, reducing the employee's tax home pay, but some employers may decide to pay all these taxes for their employee).

- Federal Unemployment Tax (FUTA) (approximately 1.5% - for 2013 - of the first $7,000 of cash wages )

- State Unemployment Tax (SUTA) (an initial rate of 4.1%  of the first $10,300 of wages).

 

How much more will I pay if I pay on the books vs. off the books? That depends on a large number of factors, but  people who pay on the books pay about 11% more than those who pay off the books. (plus ancillary costs if you use a service).  Many Nannies want to get the same take home pay as if they were working off the books but it is up to you to decide whether you want or need to "pay up" or "gross up." Also-- since you are paying things like Unemployment you save money when you terminate employment (NYC will pay her unemployment). Finally, you'll also be eligible for both tax credit and possibly flex spending credits through your company to offset the extra money compared to paying off the books.

 

3. SETUP

 

FEDERAL

-        OBTAIN AN FEDERAL EMPLOYEE IDENTIFICATION NUMBER (EIN) so that you can engage in an employer/employee relationship. To do this, fill out form SS-4 with the IRS. An FAQ about EINs is HERE. You can apply:

Online Form SS-4,   Phone (800-829-4933), available immediately,  Via Fax (859-669-5760), available in  4 days

-        VERIFY NANNY'S WORK ELIGIBILITYFill out an I-9 form to document your employee’s eligibility to work. This requires that you see official documents insuring that the Nanny is allowed to work (e.g., passports, birth certificates, social security cards, etc.). (Keep a copy of all of these).

NOTE: Your employee may have been able to obtain an Individual Tax Identification Number (ITIN) by filling out a Form W-7, http://www.irs.gov/pub/irs-pdf/fw7.pdf. Even if presented with this in place of a Social Security Number, you are still required to fulfill the requirements of Form I-9.

-        HAVE NANNY FILL OUT W-4 (specifying the number of allowances).You can obtain the W-4 form online from the IRS. There is a withholding calculator here.) You may want to discuss with your Nanny that if she does not have income taxes withheld she is likely to owe significant taxes when she files.

NEW YORK STATE

-        NYS-- REGISTER WITH NEW YORK STATE AS AN EMPLOYERObtain a New York State (NYS) Withholding Identification Number and Unemployment Insurance Registration Number (based on your Federal EIN). Consult New York State's Publication #27 ("What You Need to Know If You Hire Domestic Help") for detailed instructions.

  • Online, Form NYS-100
  • Phone (888-899-8810)
  • Via Fax (518-485-8010)
  •  

- ARRANGE DISABILITY AND WORKER'S COMPENSATION. The State of New York requires you to purchase Disability for all domestic workers and Worker's Compensation for employees who work 40 hours or more a week. See here for detailed information on insurance or to purchase here. These two forms of insurance will help protect you against accidents and will cover your Nanny if she is unable to work, and you are required to have them in place before your Nanny starts. Your household policy may cover some of this.

- NYS- NOTIFY THE NYS DEPARTMENT OF TAXATION AND FINANCE OF THE NEW EMPLOYEE- to be filed within 20 days of your Nanny's first day of work (See FAQ here)

You'll need the following information:

  • Employee name
  • Employee address
  • Employee Social Security Number
  • Employer name
  • Employer address
  • Employer Identification Number
  • Whether dependent health benefits are available to newly hired employees (effective July 15th, 2011).

(NOTE: You can also send a copy of the W-4 to NYS Dept. of Finance, New Hire Notification, P.O. Box 15119, Albany, 12212-5119.  Or Fax to 518-320-1080).

-        NOTIFY YOUR EMPLOYEE OF THEIR WAGES (effective April 9, 2011) as required by the Wage Theft Protection Act (see FAQ). This is a law to notify workers of their pay rates. You are required to notify them and you must keep signed copies on file for 6 years but are not required to file this paperwork. You are required to do this annually (and in the Nanny's primary language) and it must contain:

  • The employee’s rate(s) of pay;
  • The basis of the employee’s rate(s) of pay (e.g. by the hour, shift, day, week, salary, piece, commission, or other);
  • Whether the employer intends to claim allowances as part of the minimum wage, including tip, meal, or lodging allowances, and the amount of those allowances;
  • The employee’s regular pay day designated by the employer in accordance with the frequency of pay requirements in the Labor Law1;
  • The name of the employer and any "doing business as" names used by the employer;
  • The physical address of the employer's main office or principal place of business, and a mailing address if different;
  • The telephone number of the employer;
  • Any such other information as the commissioner deems material and necessary.

To make it easy, You can obtain Sample Forms in different languages through the NYS Department of Labor. The hourly rate employee pay notice in English is here.

 

4. ONGOING

 

IMPORTANT: Keep a record of ALL payments to your Nanny (whether check or cash) as well as the number of hours worked. whether you pay on or off the books, if you are asked to prove how long she worked it will be your word against hers.  As one parent pointed out "the IRS intends for "cash wages" to include payment by check, money order, etc, but I think "cash wages" is very unclear - people may think that they don't owe the tax if they pay by check."  T

NEW YORK STATE

NYS INCOME TAX (QUARTERLY): You can withhold states income tax only at your Nanny's request. They need to fill out Form IT-2104 (which you can find here). (NOTE: You need to report these withholdings quarterly using form NYS-45; Form NYS-1 if you without more than $700 per quarter). You'll mail these to NYS Employment Taxes, P.O. Box 4119, Binghamton, NY 13902-4112).

NYS UNEMPLOYMENT INSURANCE TAX (SUTA) (QUARTERLY (required if you pay your Nanny $500 or more, although voluntary at any amount under $500). Paid QUARTERLY (Q1:4-30, Q2: 7-31, Q3: 10-31, Q4: 1-31) using FORM NYS-45 (and you can file online). You only pay unemployment taxes on the first $8500 you pay your Nanny. Your rate is determined by the NYS Department of Labor and will be sent to you. (It's based on amount of time you've been subjected to unemployment insurance law, timeliness of your quarterly taxes and promptness of taxes as well as the balance in the State Insurance Trust Fund. Base pay rate in 2011 was 4.1% or about $350) So Pay ON Time! The NYS DOL has a site that helps you with Unemployment Insurance here.

Make sure to close your account if you no longer hire a Nanny. This can be done through the Department of Labor's Liability and Determination Section (212.266.5325). You'll need to fill out an IA-15 form New York State Department of Labor Change of Business Information Form for the Unemployment Insurance Program.

DISABILITY AND WORKERS COMP INSURANCE (ANNUALLY) The State of New York requires you to purchase Disability for all domestic workers and Worker's Compensation for employees who work 40 hours or more a week. See here for detailed information on insurance or to purchase here.  Your insurance provider may already include this, but check! It allows your Nanny to get Unemployment if they get hurt, and protects you from liability for injuries on the job. Disability costs around $80.00 per year and workers compensation costs between $400-$600/year).

Note: Penalties for failing to report appropriate wages, worker's compensation, disability insurance, and taxes to the NYS Department of Labor and the IRS can run you in the tens of thousands, not counting failed overtime payments to your Nanny.  Do it right the first time and avoid all of these worries!

IN HOUSE (You don't file this with any agency but must have proof upon request that it's been done)

 ANNUAL WAGE NOTIFICATION (effective April 9, 2011) as required by the Wage Theft Protection Act (see FAQ).This is a new law to notify workers of their pay rates. You are required to do this annually (and in the Nanny's primary language) and it must contain:

  • The employee’s rate(s) of pay;
  • The basis of the employee’s rate(s) of pay (e.g. by the hour, shift, day, week, salary, piece, commission, or other);
  • Whether the employer intends to claim allowances as part of the minimum wage, including tip, meal, or lodging allowances, and the amount of those allowances;
  • The employee’s regular pay day designated by the employer in accordance with the frequency of pay requirements in the Labor Law1;
  • The name of the employer and any "doing business as" names used by the employer;
  • The physical address of the employer's main office or principal place of business, and a mailing address if different;
  • The telephone number of the employer;
  • Any “such other information as the commissioner deems material and necessary.”

 

FEDERAL

-        SOCIAL SECURITY, MEDICARE and UNEMPLOYMENT TAXES (Federal Unemployment Tax (FUTA) and New York State Unemployment Insurance (SUTA): You make Federal income tax and Social Security, Medicare and Unemployment tax payments annually on Schedule H of your federal tax return. (NOTE: income tax withholding is voluntary, Social Security and Medicare is mandatory.)

  1. Social Security Taxes (shared responsibility): Employer- 6.2%, Employee-6.2% of wages paid. (The employee's share is withheld from their wages.)
  2. Medicare Taxes: Employer-1.45% and Employee-1.45% (The employee's share is withheld from their wages)
  3. Unemployment Tax applies to the first $7,000 you pay your Nanny (after subtracting exempt payments) The tax rate is currently approximately .08% and payments go to: IRS, P.O. Box 804521, Cincinnati, OH, 45280-4521.  The unemployment taxes to pay include Federal Unemployment Tax (FUTA) in addition to the New York State Unemployment Insurance (SUTA) described above.

(NOTE: Some employers pay their Nanny's share of these taxes so that the amount of take home pay isn't as low. If you do this you will fill out the W-2 without holdings for your employee.)

FEDERAL WITHHOLDING is also paid on the Schedule H. You can withhold federal income tax only with the employees W-4 request. For further information, please consult the IRS’s Employer Tax Guide

FORM W-2 and FORM W-3: Four copies of the W-2 must be given to your employee and a machine readable copy must be filed with the SSA, along with a W-3. (NOTE: these are example forms. To order official IRS forms, call 1-800-TAX-FORM (1-800-829-3676) or Order Information Returns and Employer Returns Online, and they will mail you the scannable forms.) You can file these electronically but you must be registered through their online business services.

BEFORE MARCH. FILE FORM W-2 AND W-3to the Social Security Administration.

BY APRIL 15TH: FILE SCHEDULE H WITH YOUR FEDERAL INCOME TAX RETURN (Form 1040). The amounts on Schedule H for Medicare and Social Security Taxes depend on whether you pay the both employee's and employer's share of taxes.

 

5. ASSISTANCE

 

ASSISTANCE WITH FILING

While many complain of the tediousness of the regulations, there are now many resources available that will assist you in paying your household employee ‘on the books’.

You can do all the paperwork on this yourself, but there is quite a bit, and the IRS is not too charitable about missed deadlines. ("They treat you just the same as if you're IBM," one mom said.) .

 

NANNY TAX PREPARATION COMPANIES:

Several firms specialize in nothing but domestic worker tax law and have received good support from Park Slope Parents' members (HERE). These services will probably run you $700 or so annually. Your accountant can advise you on what is best for you.

 

PayPrep USA Inc

329 3rd St., #3C

Brooklyn, NY 11215

718-832-2032, 347-423-4591

http://www.payprep.com/

Notes: Easy-to-use online system with local assistance.

 

Home/Work Solutions, Inc.

2 Pidgeon Hill Dr. #550

Sterling, VA 20165

1-800-NaniTax, (703) 404-8151

www.4Nannytaxes.com

Notes: Great calculator on site to determine all taxes

 

NannyTax, Inc.

51 East 42nd Street – Suite 601

New York, NY 10017

1-888-NANNYTAX, (212) 867-1776

www.Nannytax.com

Notes: Very helpful with free home consultations.

 

SOFTWARE:

Intuit has a household payroll processing service that allows you to calculate taxes, pay federal taxes online, offers direct deposit for you Nanny, keeps track of hours worked, payments, vacation time, sick days and more.

Essentia, Inc. has software called NannyPay. This software acts as payroll software and calculates gross and net pay for your household employee.  It also helps you produce tax reports for quarterly and annual filing, including W-2 and W-4 forms.  The product can be downloaded here.

   

 

6. CHECKLIST FOR PAYING NANNY TAXES

 

Per Paycheck, withhold 

- Social Security Tax and Medicare

- Federal and State Unemployment Tax (Federal Unemployment Tax (FUTA) and New York State Unemployment Insurance (SUTA))

 

Quarterly

- NYS Unemployment and withholding via NYS 45

 

Annually
- Complete Annual Pay notice and have employee sign. Keep for 6 years.

- Pay workers' compensation premium if worked for 40 or more hours per week (separate policy)

- Pay disability premium (separate policy)

- Schedule H (due with 1040 annually)

- W-2 copies to Nanny

- W-2 to SSA (must be machine-readable)

- W-3 to SSA (must be machine-readable)