The convenience of having an in-home caregiver for your kids comes at a premium price and with considerable tax ramifications.
The national average weekly rate for a nanny in 2021 was $694 for one child or $715 for two, according to the most recent Cost of Care survey from Care.com. That compares with $226 for one child or $429 for two children at a day care center. And because a nanny is a household employee, the Internal Revenue Service (IRS) requires you to withhold and pay tax if her income from the nanny job reaches a certain annual minimum threshold—for 2023, it’s $2,600.
As a nanny’s employer, you must pay your share of Social Security and Medicare (FICA) taxes—an amount equal to 7.65 percent of her wages—as well as federal and state unemployment taxes. In addition, you must withhold from the nanny’s pay her share of FICA tax, which is 7.65 percent of her wages. The nanny’s earnings are subject to federal and state income tax, too.
To simplify the task of withholding and paying tax, consider a payroll service. You can look for a local accountant who offers payroll assistance or check out a provider that operates online. SurePayroll ($50 monthly; www.surepayroll.com), for example, calculates the amount of tax owed, deducts tax from the nanny’s pay, arranges direct deposit of paychecks into her bank account, and remits federal, state and local taxes for you. The program also prepares Schedule H, which reports household employment taxes on your federal tax return.
Other providers of similar online services include Poppins Payroll ($49 monthly; www.poppinspayroll.com) and HomePay ($75 monthly; www.care.com/homepay). If you’re willing to file and send tax payments yourself but want help tracking them and figuring out how much you owe, try Simple Nanny Payroll ($29 yearly; www.simplenannypayroll.com).
To ease the tax bite, you can contribute to a dependent-care flexible spending account (FSA), if your employer offers one. You can stash away pretax money from your paycheck to cover care for children younger than 13 while you work or look for work. Qualifying expenses include a nanny, day care, preschool, after-school programs, and summer day camps. The IRS limits household contributions to dependent-care FSAs to $5,000 per year (or $2,500 yearly for those married filing separately).
The child and dependent care tax credit can help offset care expenses, too. You can claim the credit on up to $3,000 in care expenses for one child or up to $6,000 for two or more children. (Only expenses that are not reimbursed by a dependent-care FSA are eligible for the tax credit.)
As with an FSA, the care must take place while you work or look for work, and the child must be younger than 13. The maximum credit that you can claim depends on your adjusted gross income. If your adjusted gross income (AGI) is more than $43,000, you can claim up to 20 percent of care expenses. The percentage increases as AGI decreases, topping out at 35 percent for those with AGI of up to $15,000.
