By Tom Breedlove of HomePay by Breedlove
When a family decides to hire a nanny to care for their kids, both parties are completely focused on fit – financial, schedule, personality, etc. Once everything is aligned between family and caregiver, the final step is to make sure all the tax and legal aspects of employment are handled correctly.
The maze of federal, state and local tax law and labor law can be confusing and tedious. And unfortunately, when families and caregivers take to the Internet for answers, most of what they find is wrong or misleading. Even most tax professionals struggle to keep up with all the labor law exceptions, exemptions, and nuances that are carved out for domestic employers.
Because of all the factors that must be considered, we always advise talking to a household employment specialist. A few minutes with an expert usually saves thousands of dollars and lots of stress. Short of a personalized consultation, here are some basics that everyone in the care industry should understand:
1. Nannies are entitled to overtime. According to the Fair Labor Standards Act, a nanny is considered a non-exempt employee and must be paid overtime (1.5 times her regular hourly rate) for every hour she works over 40 in a 7-day workweek. (Note: California also has daily overtime requirements). To avoid any issues with overtime, nannies should accurately keep track of how many hours they’re working each day and families should keep an eye on the running total – especially during busy weeks where overtime may come into play. It’s worth noting that live-in nannies are exempt from federal overtime law. However, some states have special requirements for live-in workers so the exemption is not universal. You can check your state’s requirement on our website at www.myhomepay.com/Answers/RequirementsByState.
2. At year-end, nannies should receive a W-2. The most common tax mistake families make with their nanny’s taxes is providing her a Form 1099 at year-end instead of a Form W-2. A 1099 is used for independent contractors and should never be used for a worker that is legally deemed an employee, which is the case for almost all domestic workers. Aside from restricting the nanny’s professional benefits (unemployment, workers’ comp, disability, etc.), an independent contractor also has to pay both halves of the FICA tax instead of just the employee portion. That’s an additional tax burden of 7.65%. For a nanny earning $40,000 per year, allowing the family to treat them as an independent contractor means the nanny must pay an additional $3,000 in taxes each year.
3. Nannies should be paid through a personal bank account. Many families run their own business, but generally, it is illegal to pay a nanny through their company’s payroll. This is because a nanny does not directly contribute to the success of a business, so including her payroll as a business expense is an illegal tax deduction. Instead, the nanny should be paid through a personal bank account because she is a direct contributor to the family. And just like businesses receive tax deductions for payroll expenses, families that pay “on the books” are typically entitled to dependent care tax breaks on their personal income taxes.
4. Trial periods are considered working hours. Families often start a nanny on a trial basis to make sure the relationship is a good fit for both parties. There’s nothing wrong with a formal trial period, but the IRS and Department of Labor view it as a real employment situation. The family is legally considered the employer for the trial period and all wages must be reported (assuming the Casual Babysitting Exemption threshold of $2,000 in a calendar year was crossed).
Tom Breedlove is Director of HomePay, formerly known as Breedlove & Associates. For 25 years, they’ve managed the nuances of household payroll, tax and HR-related topics for tens of thousands of busy families across the country. Tom has spent more than a decade with the company focusing his efforts on supporting the needs of nanny agencies, their counselors, and their families. To learn more about HomePay, please visit their website: www.myhomepay.com