Tax Tip of the Week | No. 310 | The Nanny Tax

Tax Tip of the Week | July 8, 2015 | No. 310 | The Nanny Tax

Now that the school year has ended, it is time to consider child care during the summer months.Instead of sending children to day care or summer day camp, many parents consider hiring a nanny or frequent baby sitter to watch their children. As if balancing work and childrearing is not challenging enough, if parents get outside help to care for their children at home, they will also need to understand the tax implications. Unless they are tax experts, they probably have a few questions about how to do things correctly.If parents have a nanny or frequent babysitter watching their children at home, that person is considered a household employee if she is in charge of what work is done and how it is done (which is usually the case). It does not matter whether the person works full time or part time, or that the person was hired through an agency or from a list provided by an agency or association. It also does not matter whether the person is paid for the job on an hourly, daily or weekly basis.On the flipside, someone providing childcare services in his or her own home is not a household employee of the parents. Likewise if an agency who provides the worker is in charge of what work is done and how it is done, the worker is not a household employee of the parents.As a household employee, a nanny or frequent baby sitter is going to cost parents more than the rate they pay for watching their children. In addition to paying the employee’s wages, they may be required to pay household employment taxes, popularly referred to as the “nanny tax.”The nanny tax involves two separate employment taxes. Whether the parents are responsible for either depends on the amount they pay.First is FICA, which is Social Security and Medicare taxes. FICA is a 15.3 percent tax on cash wages that is generally split equally between the employer and employee. Parents and their household employee each pay 7.65 percent—which is 6.2 percent Social Security tax plus 1.45 percent Medicare tax.In 2015, the IRS requires anyone with a household employee to withhold and pay FICA for any employee with annual cash wages of $1,900 or more.The rules and reporting of “nanny wages” and “nanny taxes” get pretty complicated real quick.The important thing to remember is that if you pay someone more than $1,900 this summer, you need to give us a call.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt – the guy behind TTW...until next week.