Nanny Retirement Plan
Nanny Retirement Plan
Frequently Asked Questions
HomeWork Solutions
Client Focused.
Your Friend Can Save $$$!
What Clients Are Saying
It is a real pleasure to work with an outfit that is so well organized, knowledgeable, efficient.....and above all, courteous.
Your staff are outstanding and your web services are so user friendly.
I can go about my business confident that my nanny's payroll is in good hands.
Wonderful service staffed by nice people who enjoy dealing professionally with the all to often less than thrilling payroll taxes.
How can I help my nanny build a tax-deferred retirement savings account?
There are some practical ways an employer can help their nanny build a tax-deferred savings account.
The SEP-IRA
Employers can set up a SEP-IRA for their nanny. The contributions are 100% funded by the employer. Sometimes employees will ask to 'defer' a raise and have the $50 or so a week contributed by the employer into the SEP-IRA on their behalf. This benefits the employer as there are no employment taxes due on those contributions. The nanny benefits because their total income is lower, reducing their income taxes. SEP-IRA contributions are 100% vested to the employee.
Be advised, if you have more than one employee, you must offer this plan to all employees. This is referred to as a non-descrimination provision, and is mandated in the tax code.
Contributions to a SEP can be made between 0% to 25% of compensation up to a maximum of $49,000 for 2009 & 2010 ($46,000 for 2008). Contributions to a SEP IRA can be very flexible. The employer is not required to make contributions on an annual basis but must contribute the same percentage for all employees.
The Traditional IRA
The easiest solution (albeit not the least expensive to the employer) is to make a contribution to a nanny's traditional IRA. If she does not already have an IRA established, this can be done at any brokerage firm or bank. Some larger brokerages include Fidelity, Charles Schwab, and Vanguard - however there are hundreds, if not thousands, of such firms.
When an employer makes a contribution to a nanny's traditional IRA, this is reported as additional income to the nanny, and Social Security and Medicare taxes are due on the amounts. Most employers 'gross-up' the contribution, meaning that a net $2000 contribution would add $2166 to the nanny's reported income and cost the employer $2330 to make after Social Security/Medicare taxes are accounted for. The nanny deducts the hypothetical $2000 contribution amount from her personal income tax return, deferring the taxation of the contribution.
The contribution limits to a traditional IRA are as follows:
| YEAR | AGE 49 & BELOW | AGE 50 & ABOVE |
| 2002-2004 | $3,000 | $3,500 |
| 2005 | $4,000 | $4,500 |
| 2006-2007 | $4,000 | $5,000 |
| 2008 | $5,000 | $6,000 |
| 2009 | $5,000 | $6,000 |
| 2010 | $5,000 | $6,000 |
After 2008, the contribution limit will be indexed and rise in increments of $500 depending upon the level of inflation.
The SIMPLE IRA
Employers who wish to make retirement savings contributions in excess of the annual IRA contribution limits and with employee participation may consider establishing a SIMPLE IRA. A SIMPLE IRA plan is a Savings Incentive Match PLan for Employees and, like a 401K, there is an employee contribution in the form of payroll deductions and an employer contribution. Employer contributions are established at account setup and are typically a dollar for dollar match of the nanny's contribution, up to 3% of the nanny's annual salary. Each employee is always 100% vested in (or, has ownership of) all money in her SIMPLE IRA.
The nanny's contribution to the SIMPLE IRA is subject to Social Security and Medicare taxes, but not to income taxes. The employer's matching contribution is tax free. The nanny's contribution to the SIMPLE IRA reduces her income subject to Federal and State income taxes on her W-2 and is separately reported on her W-2.
Unlike the SEP plan nondiscrimination rules, you do not need to cover all employees under a SIMPLE IRA plan. The employer may exclude any employees who have not earned at least $5,000 during any two preceding years and are not expected to earn at least $5,000 in the current year.
What about a 401K?
Generally speaking, a true 401K plan is not a viable option for household employers. Like the SEP plans, a nondiscrimination rule applies, meaning that all employees in your household must be covered. Also, 401K plans typically require that the family engage a plan provider or plan administrator (at cost to the employer) to comply with all administrative, recordkeeping, and participant statements, as required by the law.
Last Updated November 2009
For More Information contact HomeWork Solutions, Inc.
at 1-800-NaniTax or e-mail and submit a question.
