Summer Nannies & the Nanny Tax

What are my tax responsibilities with a temporary nanny hired just for the summer? She will only work for us for 8 or 9 weeks.

Any individual whom you employ to provide services in your home whom you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold ($1700 in 2009) must receive a W-2 from the employer (family) and the employer must pay the payroll taxes. It makes no difference whether the employee is full time, part time, or simply temporary. The IRS is unambiguous about this.

• Social Security & Medicare Taxes (15.3% of Gross Wages - employer may collect 7.65% from the employee via deductions.)


• State Unemployment Taxes where required.


• Federal Unemployment Tax (FUTA) where required.

The employer is solely responsible for the remittance of the Social Security and Medicare taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer.

A family will often hire a temporary nanny who may work for just several weeks. Legally, she is your employee the first day she starts with you, and labor law protections such as overtime and minimum wage apply. Your tax liability for the Social Security and Medicare taxes, however, will only kick in if you pay this individual the annual threshold amount ($1700 in 2009). Your tax liabilities, therefore, are not a factor of whether she is an employee or not, but rather how much you pay her.

TIP: Never make any payment to a nanny, temporary or permanent, without first obtaining the nanny's full legal name, Social Security Number, and permanent mailing address.

Be advised that unemployment tax liability thresholds are lower - between $500 and $1000 depending on the state. So it is possible to have a temporary nanny for whom you do not have to pay the Social Security and Medicare taxes, but do have unemployment tax liability. These situations should be thoroughly discussed with your nanny tax preparer.

The IRS requires that you provide your temporary nanny to whom you paid between $600 and the annual liability threshold with a Form 1099 MISC and file the appropriate copies with the IRS. You may voluntarily provide and file a Form 1099 MISC to any nanny you pay any amount below the current year Social Security/Medicare tax liability threshold.

If you wish to avoid this obligation, we recommend that you engage a temporary nanny that is paid by the referring agency. This is a bit more expensive, but can save you all the tax headaches. When you hire through the agency, you make your payments for example to 123 Nanny Agency Inc. - and not to Mary Jones.

State Unemployment Funds Run Low and Fraud Increases.

14 states, faced with empty unemployment fund coffers, have borrowed from the Federal government's unemployment trust fund (funded by FUTA taxes) as of the end of May. More are expected to by summer end. Outstanding trust fund loans currently total over $9 billion

According to Wayne Vroman, an economist at The Urban Institute, the current recession is more severe than the 2001 and 1991 periods, and more closely resembles the back to back recessions of 1980 and 1982. Most states are now considering increases to either their taxable wage bases (the amount of earnings per worker subject to the tax) as Rhode Island just recently did or increases to the employer's contribution rates.

Integrity operations, designed to combat fraud, including overpayment detection and collection examinations, fraud and special investigations units, and reemployment activities are working in high gear. Overpayments are primarily identified via new hire reporting systems in place in all states and examination of employer quarterly reports which include the names and SSNs of all employees. States are leaning heavily on employers with delinquent quarterly tax reporting, in some cases increasing the per quarter late filing penalty to $1000 per quarter!

Nanny Tax Cheating Hurts the Nannies and Housekeepers - and the US Treasury.

Finally, someone gets it! In an editorial published Friday, June 5, Niger Innis of the Congress for Racial Equality (CORE) takes on the real harm caused by nanny tax cheating.

Failure to pay the nanny taxes costs the US Treasury $5 Billion a year in uncollected revenues - revenues desperately needed to advance President Obama's ambitious agenda, including universal health care.

Brought down to the individual nanny or housekeeper's level, according to Mr. Innis:

Failure to pay the employment taxes for nannies, housekeepers and other domestic workers means those who are trusted to care for our children, our elderly and our homes are cheated from the full protections of America's social safety net. Many of these workers are minorities. When a domestic worker's unemployment tax is not paid, the worker will have trouble collecting unemployment insurance benefits if he or she is laid off. If the tax is not paid for a domestic worker who serves a family for his or her entire lifetime, the worker cannot collect full Social Security and Medicare benefits in retirement. It is sad that a person entrusted to raise children or care for the aged would be left unprotected and vulnerable because of ignorance or greed.

He isn't kidding - HomeWork Solutions has worked with attorneys and Trust Companies in the past to catch up on years of back "nanny taxes" brought to light when the retiring housekeeper finds out there are no Social Security wage credits for the past 10, 15, 20 years or more. This can make a difference of many hundreds of dollars each month in Social Security benefits - you bet the retiring worker doesn't hesitate to blow the whistle when they find that out!

Mr. Innis concludes:

By abandoning their "nanny tax" responsibilities, the rich and powerful leave the working poor to pay the price. It's Robin Hood in reverse.

HomeWork Solutions is proud to work with families who are voluntarily complying with nanny tax rules - even though it is expensive, even when they don't want to. Nanny tax compliance can be confusing and time consuming - yet our clients do it anyway because it is the right thing to do.

State Tax Increases on the Way

I wrote last month that many states, facing huge budget shortfalls, were considering increases to many taxes, including income taxes. California and Arizona enacted income tax increases effective May 1. New York also increased income taxes in the highest income brackets.

CNN reports today that there are $24 billion in state tax increases being considered. States are being squeezed by a record drop in tax revenues coupled with a dramatic increase in demand for social service spending. Unlike the Federal government, which can and does run deficits, most states are required by their state constitutions to balance the budget. $8.8 billion of the total $24 billion of increases is expected to be in personal income taxes.

Household employers have to watch the tax changes carefully in the coming months. This is a highly unusual year, where we have already seen a mid-year drop in Federal income tax rates and two substantial mid-year increases in state taxes. When you agree to deduct (withhold) your employee's income taxes, your employee then depends on you to properly withhold the taxes. HomeWork Solutions commits to provide employers notice, both via this blog AND via direct email, when changes occur. Clients who pay their employees directly then must follow up and adjust the payroll calculations.

Police Stress Importance of Nanny Background Checks

HomeWork Solutions has advised clients for years to thoroughly reference check and background check any household employees, and most especially nannies and employees who will work with children or disabled adults.

Greenwich CT police recently issued the same warnings. A Brazilian nanny is accused of being a one-woman crime spree, moving from home to home as a nanny and stealing something from each employer along the way. What stands out is EACH of these employers hired the woman to care for children without verifying her references or doing criminal background checking.

Parents - your children depend on you to thoroughly reference and background check their caregivers before you leave them alone. Criminal background checks start at $49.95 at 4nannies.com - and average $150 for a complete package. This is a small price to pay for the security and peace of mind of knowing you have done all you can to keep your children safe.

Lastly, when you let a nanny go, please make sure you let your neighbors, schools and any other adults your child may be entrusted to know the nanny is no longer authorized to pick your child up.

Other Resources:
How to Screen the Nanny
Common Nanny Hiring Mistakes