Most of us when we think of the word “nanny” picture a twenty-something college student, watching the kids during the weekdays for cash before she heads home for the night. Rarely, if ever, do we think “employee, with payroll, a time-card, and W-2”.
But did you know that under tax law that’s exactly how a nanny should be treated? If you’re about to hire a nanny, stop first to read just what’s required to be tax compliant.
1) Classify Your Nanny as an Employee
As the IRS has consistently held that household workers are not independent contractors, but rather employees, not classifying a nanny as such can be labeled as felony tax evasion. After all, the family sets the rules, babysitting schedule, and provides the necessary equipment to keep the children fed and happy, meeting all the descriptors of an employee who should receive a W-2 at the end of each tax year.
2) Pay Overtime and At Least Minimum Wage
Under federal law, all domestic workers are entitled to at least the federal minimum wage of $7.25 per hour, but many states and counties have higher minimums. Worker’s rights call for the highest minimum wage between state, local, or federal rulings to be paid, so be sure to check your area to see which rate applies.
In addition, federal rules require overtime for any hours worked over 40 per week must be given to any nanny in your household – though some exceptions exist for live-in care and companionship. Failing to comply with either of these can result in costly lawsuits, so know what’s required of you as an employer! And remember to check your state rules to make sure you comply with the most stringent rules.
3) Track Hours Worked
As all nannies are employees, it’s next to impossible to put together an accurate W-2 without records. Getting in the habit of tracking hours worked can not only help determine how often and how much a household worker should be paid, according to state law and Domestic Workers’ Bill of Rights, but also make tax season easy for the both of you.
4) Ask for Form I-9
As immigration laws have increased, employer audits have risen astronomically while ICE attempts to limit the promise of work in the U.S for illegal aliens. As such, to ensure that you’re hiring in accordance to the law, always ask for a Form I-9 from your household workers, along with documents to confirm their identity, before giving any nanny the job.
5) Research Workers’ Compensation
Though coverage requirements vary by state, not getting workers’ comp. for your household worker can be a costly mistake.
Luckily, some states like New Jersey and California allow you to add workers’ compensation into a homeowners insurance policy, so rather than neglecting coverage altogether – a mistake that can cost you up to $2000 every 10 days without it – research your state and the requirements it holds.
6) Keep Payroll Separate
If, while classifying your nanny as an employee, you think you can simply mix their payroll with all your other employees’ payroll in your business, think again.
As nannies aren’t considered a necessary function to your company, calculating employment taxes along with business payroll is actually illegal and should appear only on personal accounts.
7) Use Schedule H
A common mistake for those used to filing under Form 941 for their business, using Form 941 to report household workers rather than Schedule H can cause problems in one of two ways.
As Schedule H needs to be filed only once annually, and Form 941 with every quarter, either A) employment taxes are unintentionally reported multiple times when business and personal payrolls are mixed and both forms are used, or B) penalties stack up for each period Form 941 is used without adequate payroll data for your nanny.
Simply another reason why business and household expenses should never be calculated together, Schedule H is the surest way to file your nanny’s payroll quickly and painlessly, while firmly keeping you and your household worker tax compliant.
If you employ a household employee and need assistance, reach out to us at 310-534-5577 0r [email protected]. We’re here to help!
