Nanny Taxes and Other Legal Issues

Disclaimer: This information is for educational purposes only and should not be considered professional legal or tax advice.

Nanny Classification or W-2 vs 1099
Employer Taxes
Employee Taxes
Minimum Wage
Overtime
Wage Threshold
State and City Laws
Worker’s Compensation
Mileage Reimbursement
Tax Breaks

Nanny Classification or W-2 vs. 1099
A household employer is defined as someone who pays an individual to perform duties in or around their home and has the right to control when, where, how or by whom the work should be performed. In short, all nanny employers are considered household employers. Which means that all nannies are employees, not independent contractors or business owners.

Employer Taxes
Household employers are required to pay the employer’s portion of Social Security and Medicare, federal and state unemployment taxes, and any additional taxes your state, country, or city imposes. You can expect for your employer taxes to be 9 to 11% of your nanny’s gross wages.
Employers are also responsible for withholding their nanny’s portion of Social Security and Medicare. Employers are not legally required to withhold income taxes however most employers do for the convenience of their nanny.

Employee Taxes
Employers are also responsible for withholding their nanny’s portion of Social Security and Medicare. Employers are not legally required to withhold income taxes however most employers do for the convenience of their nanny.

Minimum Wage
Under the Fair Labor Standards Act (FLSA), all nannies must be paid at least minimum wage for every hour worked. Some states have a higher minimum wage and in those states, the higher rate applies. More and more cities are passing local laws requiring a higher minimum wage and if you live in one of those cites, the higher rate applies. If you’re unsure of the minimum wage in your area, visit Homepay by Breedlove’s Requirements by State pages.

Overtime
The Fair Labor Standards Act (FLSA) requires that all LIVE-OUT nannies receive overtime for all hours worked over 40 in a work week. Some states have stricter overtime thresholds (e.g. overtime must be paid for all hours worked over 8 in a day) and in those states, the stricter threshold applies.

Some states also require that overtime be paid to LIVE-IN nannies. To get information about your state, visit Homepay by Breedlove’s Requirements by State pages.

Wage Threshold
Remember years ago when the government said they were going to simplify the nanny tax? They came up with the Household Employer Wage Threshold, a way for parents who only had a nanny for a short time and therefore didn’t pay a lot in wages avoid the complexities of the nanny tax. In 2015 that threshold is $1,900. This means that parents who pay their nanny less than $1,900 in 2015 are exempt from paying employer taxes and from withholding employee taxes on the nanny’s income. However if the employer pays the nanny over $1,900, say $1,901, they owe taxes from dollar one.

State and City Laws
The Fair Labor Standards Act (FLSA) is the federal law that regulates nanny wages. This is the law that tells us all nannies must be paid minimum wage and live-out nannies must be paid overtime. There are also many state and/or city laws that provide extra protection to nannies. They all require different things such as overtime for live-in nannies, a higher minimum wage, paid sick days, payout of accrued paid time off when leaving a job, or receipt of the final paycheck within a set period of time. Because of all of these different laws, I suggest you contact a recommended nanny tax company before your new nanny starts to see what laws apply to you.

Worker’s Compensation
In some states, employers are required to carry state sponsored worker’s compensation insurance. In other states, the employer has the choice of participating in the state sponsored program or finding a private carrier. Others states have no requirements at all. To find out what your state’s law is, visit Homepay by Breedlove’s Requirements by State pages.

Workers’ compensation laws are strict liability – fault and negligence by the employer doesn’t need to be established in order for the employee to collect benefits. In exchange for the assured benefits, the employee gives up her right to sue the employer for any injury covered by worker’s compensation laws.

If you’re not required to participate in your state’s program, you may already be adequately covered under an umbrella homeowners’ policy. If your policy doesn’t cover household employees, your insurance agent can often add a rider to provide the coverage you need.

Mileage Reimbursement
In many states, a nanny is legally entitled to the IRS mileage reimbursement rate for every mile she drives on the job when using her own car. This reimbursement covers the full cost of operating the car including gas, regular maintenance, and repairs. The rate increased to 57.5 cents per mile beginning January 1st, 2015.

Tax Breaks
The good news is there are lots of ways to save on your nanny taxes. Here’s a rundown of the ways you can save money. Each is linked to more details on the HomePay by Breedlove website.

Dependent Care Account or Flexible Spending Account Many companies allow employees to put up to $5,000 of pre-tax earnings in a dependent care account that can be used to pay for childcare.

Child Care Tax Credit If your company doesn’t offer a Flexible Spending Account, you can take the Child Care Tax Credit on your federal return.

Health Insurance Benefit If you only have one household employee and you contribute to her health insurance premium, that premium is non-taxable income. If you purchase her policy through SHOP, you can get an additional Small Business Tax Credit.

Non-Taxable Income There are several benefits you can provide your nanny that are considered non-taxable income which means you neither you nor your nanny has to pay taxes on that amount.
1.  full or partial health insurance premium
2.  tuition & books for an accredited college or university
3.  public transportation
4.  parking