Setting Up Your Nanny's Payroll and Taxes: What to Know

Whether your work takes you away from your home or you have other obligations outside of your home, hiring a nanny is a great option to help you out while guaranteeing that your children will be taken care of. Depending on your situation, you may require a standard nanny or live-in nanny to accommodate the needs of you and your children. Regardless of the type of nanny you need, setting up payroll and taxes is important for both you and your nanny’s sake.

Most people are casual about paying their babysitter and/or nanny, but it is something that is required under the law and can actually help your nanny out in the long run for a number of reasons. While setting up payroll and taxes for your nanny sounds completely foreign and overwhelming, these five tips will help guide you along the way and ensure you are doing it the right way.

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Why You Should Payroll Your Nanny

Though it is definitely easier to avoid the headaches of taxes by paying your nanny under the table, doing so can actually hurt your nanny in the long run and potentially get you in trouble. There are several reasons to payroll your nanny, according to Elizabeth Helen Spencer of Money Under 30. These reasons include:

1. The ability to earn a tax deduction for childcare costs

2. The ability for your nanny to potentially have unemployment benefits

3. The ability for your nanny to build their social security benefits

4. The lesser likelihood of owing money in back taxes

Additionally, the IRS has specific guidelines regarding taxes and household employees. What is a household employee? According to the IRS, a household employee is someone who is hired to do work in your home, and if you can control not only what work is done but how it is done by the nanny. A household employee can include: babysitters, nannies, maids, and caretakers, to name a few.

With an understanding as to why you should payroll your nanny, let’s dive into some ways to make the process easier for you when you do it!

How to Payroll Your Nanny

Talk With Your Nanny First: Prior to digging out your calculator and sifting through important documents, talk with your nanny about establishing a payroll for them. Being on the same page regarding wages and taxation is necessary for the both of you to have a fair and equal work dynamic. In a lot of cases, nannies are paid without taxes or any kind of payroll, so this might be new and unfamiliar to them. Talking it out is a great way to familiarize your nanny with your plans, as well as be open and honest with them about what they deserve.

Look into a Payroll Service: Undoubtedly, you can calculate the numbers, fill out the paperwork, and leave all the technical work to yourself in terms of handling the payroll and taxes, but who wants to do that? Handling personal taxes is enough to cause a headache and leave you overwhelmed, and this can certainly be amplified when dealing with an employee of your own. There are several payroll services online that you can use, including Quickbooks and ADP, which can input all necessary information for you.

Collect Important Documents: When it comes to taxes, there are a few necessary documents both you and your nanny will need in order to file properly. These documents will make it easy for you to input the information when required and make for a smooth process of filing taxes. Here is what you will need:

– For You

1. Primary contact information, including name, address, main phone number, email address, etc.
2. Social security number
3. Federal and State tax identification numbers
4. The total compensation for your nanny

– For Your Nanny

1. Mailing address
2. Social security number
3. Federal and/or state W-4 forms

Track Working Hours: In regards to compensation, you have to establish an hourly wage and track the nanny’s working hours (including overtime), so you can accurately calculate their compensation and wages. Desiree Leung of Care.com notes, “Whether you use a payroll service or not, you’ll need to make sure to factor in overtime if your nanny works more than 40 hours in a week. When this occurs, you must pay them time-and-a-half (1.5 times their hourly rate) for those additional hours.”

Calculate Your Taxes: Adding up the numbers for taxes is burdensome to do on your own. While it is necessary, there are tools you can use to make the process a lot easier. Care.com has its own nanny tax calculator, which you can use to add in your nanny’s pay rate, how many hours they work, and the frequency of their pay.

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Though payrolling your nanny is a lot of work, in order to properly take care of your employee and avoid any trouble with taxes, it has to be done. Thankfully there are tools and online resources to help make the process easy and less complicated. If you follow the advice detailed above, you’ll become a payroll pro before you know it!