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Nanny Tax
When you hire someone to care for your child in your home, you become an employer and must treat the caregiver as an employee. (In this brochure, we use the term in-home caregiver, although they are sometimes called nannies, babysitters or Au Pairs.) Because the caregiver works under your direction and control, the caregiver is not an independent contractor who is responsible for paying his or her own taxes.
Some parents choose not to withhold the proper taxes because the caregiver is not reporting the income to the government. This is illegal. Parents should realize that if they are audited, the IRS will hold them liable for unpaid Social Security and Medicare taxes.
There are several exceptions to the rule that an in-home caregiver is your employee. Ask your Enrolled Agent about these exceptions.
When you hire an in-home caregiver, you must follow some specific federal laws. Check with your state for its rules. The federal law requires the following:
Verify Citizenship. Every employer must verify that the employee is a U.S. citizen or is eligible to work legally in the U.S. To do this, the employer must have documents and both the employer and the employee must sign Form I-9 Employment Eligibility Verification. The employer should keep this form for three years after the date of hiring or one year after the employment is terminated, whichever is later. This form must be filled out even if the caregiver is hired through a nanny agency.
Obtain Employer Identification Number. All employers need to fill out Form SS-4 and send it in to the IRS to receive a personal Employer Identification Number (EIN). Use this number on all IRS employer forms that you file each year. Note: You may need a state identification number and you may have to report a new hire to your state to help them track down those who are behind on child support payments. Check your state for its rules.
Pay Minimum Wage. You must pay the employee at least the federal minimum wage. You do not have to pay minimum wage if the caregiver works less than 20 hours per week. Above 40 hours per week, you must pay time-and-a-half wages.
A live-in caregiver does not have to be paid overtime if you establish the regular hours that the caregiver's service is needed. You may exclude sleeping, meal time and free time in the calculation of hours worked.
Employers are not required to pay any benefits such as vacation days, holidays, sick leave, medical insurance or any other benefits. Offering specific benefits is up to each employer and can be negotiated with individual caregivers.
Federal Income Tax Withholding. You do not need to withhold federal income tax from your employee's paycheck unless the employee requests this. The employee must fill out Form W-4 at the time the employee is hired. If they do not want you to withhold, you should keep on file a signed W-4 with the notation "no withholding requested."
If the employee wants you to withhold, you must look at the tables in IRS Publication Circular E to determine how much to withhold. You would report and pay income tax withholding on Schedule H Household Employment Taxes when you file your individual Form 1040. At the end of the year you must issue a W-2 to the employee and the Social Security office.
If you do not withhold federal income tax for your employee, you must notify the person that they may be eligible to receive advance payment of the earned income credit. To do so, give them Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit or a Form W-2, which has the notice printed on the back of Copy C.
Social Security & Medicare Withholding. Employers are responsible for withholding and paying Social Security and Medicare taxes for their employees, although there are several exceptions to this general rule. Check with your Enrolled Agent.
Federal Unemployment Taxes. If you pay one or more in-home caregivers a total of $1,000 or more in any calendar quarter, you must pay Federal Unemployment Taxes (FUTA).
Advanced Earned Income Credit. You must ask the caregiver if he or she wishes to participate in the Advanced Earned Income Credit.
Finding the right person to provide reliable and loving care for your child can be difficult. By understanding your tax responsibilities in hiring an in-home caregiver, you will avoid additional problems.
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