Have a Nanny? Schedule H Guidance – A How To

It’s tax time again!  If you had a nanny, babysitter, or any household employee last year, you need to file form Schedule H with your tax return if you answer yes to any of the following:

  • Did you pay any one household employee cash wages of $2,100 in 2019 or $2,200 in 2020?
  • Did you withhold federal income tax during 2019 for any household employee?
  • Did you pay total cash wages of $1,000 or more in any calendar quarter of 2019 to all household employees?

If you answered yes to any of the above, then you should download the Schedule H itself and also the Instructions for Schedule H from the IRS website.

Schedule H – Part I

Below is an example of what Part 1 of Schedule H looks like when filled out, with some hints added in-line.  This example is for a nanny who worked during school vacations and made $7,150 gross cash wages.

While the forms below walk through an example from a prior year, Form Schedule H with your 2019 tax return will look similar, except that the limit for item 1 (Total cash wages subject to social security tax) has increased to $128,700.

Schedule H Part 1 - Summer Nanny Example

If using the Android version of the Nanny Pay Advisor app, you will find your nanny’s gross earnings for Last Year (2019) by going to the Reports section and selecting “Employee Pay Summary” for Range “Last Year”.

MainMenuReportsHighlight  ReportsLastYearHeader

For the iOS version of the Nanny Pay Advisor app, you will find this info on the top of the Pay History tab when the “Last Year” time range is selected.

Now onto Part II to calculate Federal Unemployment (FUTA) tax owed.  The calculations will vary depending on your state.

Schedule H – Part II for most states (except US Virgin Islands)

For the 2019 tax year, only the US Virgin Islands is considered a “Credit Reduction State” for Federal Unemployment (FUTA) Tax purposes. If you have employed a nanny there, skip to the next section.

For all other states, the calculation of FUTA owed is straight-forward.  You will be paying .6% (.006) of your nanny’s first $7,000 wages in FUTA.  So this means the maximum amount of FUTA you will need to pay is $42 for the year.

Below is an example from Massachusetts, a non-credit reduction state.  Notice if you can answer No to questions 10, 11, and 12, then you should leave all of Section B blank.

Schedule H - Part 2. Example for MA

Then after you fill in the calculations in Part III, then this Schedule H and payment owed goes along with your 1040/1041 tax filing.   And that’s all there is to it!

Schedule H – Part II for Credit Reduction States (US Virgin Islands)

If you have employed a nanny in the Virgin Islands, then for Part II you will need to instead fill out Section B and leave Section A blank.

In prior years, this has also applied to California and other states, but starting for the 2019 tax year, the only credit reduction state left is the US Virgin Islands.

Schedule H – Part III

Then after you fill in the calculations in Part III, this Schedule H and payment owed goes along with your 1040/1041 tax filing as part of the yearly household employer duties.

5 Reasons to pay your nanny over the table

5 Reasons to pay your nanny over the table by Nanny Pay Advisor

What’s involved in not paying under the table?

If you are not sure where to start, or you have been shocked at the full service payroll prices, let the Nanny Pay Advisor App help.  Find it for iOS on the App Store or get it for Android on Google Play.

 

Nanny vacation and holiday benefits

When hiring a nanny and discussing salary, one often overlooked discussion is that of vacation and holiday expectations.

Vacation and holiday benefit considerations

  • Will you offer a certain amount of paid time off or limit unpaid time off?
  • Is the nanny able to choose all the dates or are there any fixed days, such as during your own vacation plans or holidays? The most commonly paid holidays are New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
  • Will this time be lumped together to use for either sick, holiday or vacation? Or will they each be considered separately?
  • What sort of advanced notice do you require for time off?
  • Can the time be used immediately or only after some number of days worked (30 days, 60 days, etc)?
  • What happens to unused days? Are they rolled over into next year, forfeited, or paid out?

What is required

Federal law does not require household employers to offer paid vacation time or paid holidays for a nanny. Part-time or summer only nannies would likely not expect these perks. On the other hand, full-time year round nannies, especially experienced ones, are likely to look for or expect this benefit.

Even if a nanny does not specifically inquire about any holiday or vacation benefits, offering them can promote a positive nanny-employer relationship. This can help keep a great nanny happy and show her how much you appreciate her own well-being.

Expectation setting

No matter what you decide, you should discuss expectations up front when you discuss salary with your nanny and review yearly. In the nanny-employer relationship, upfront and frequent communication is critical in avoiding resentment and issues later on.

How to track

When using the Nanny Pay Advisor app for Android devices or the app for iOS devices, vacation or holiday time to be paid should be specified via the Time Card for the corresponding pay period.

Nanny Payroll Service Options Comparison

When you hire a nanny, you may be surprised at the complexity involved to simply pay her.  There are several different options to handle payroll.

Payroll Option  Time Investment   Cost of service per year Drawback
 Paying under the table Very Low $0 Illegal, Nanny gets no benefits
 Full Service Payroll provider Low $1,000+ High cost
 Do it all yourself High $0 Lots of time required
 Nanny Pay Advisor Medium-Low $60 Some time required

Let’s look at each of the nanny payroll alternatives in a little more detail.

  1. Pay under the table.  This is bad for the nanny and bad for you as the employer.  If you are paying $2,200 or more to your nanny in 2020, it considered tax evasion to go this route.  For the nanny, she loses out on accruing Social Security benefits, unemployment benefits, a verifiable record of employment to help build her credit history, and worker’s compensation benefits should she get injured on the job.  Luckily, there are tax breaks available to you as a household employer which can cover much of the extra cost required to pay legally.
  2. Use a full service payroll provider.  Using a company such as Care.com HomePay by Breedlove will take care the initial registration as a household employer, handle all payroll for you, and file quarterly and yearly reports on your behalf.  However, there is a steep price for this, and you may pay over $1,000 for a year of such a service.
  3. Do all the legwork yourself.   You can find out the federal, state and local requirements of what and when to register and pay for.  Then on a weekly basis calculate the required withholdings, give your nanny a pay stub, retain required records, and write a check to your nanny.  This is the cheapest of the legal options, but also the most time-consuming and tedious.  Use this handy checklist to see what is involved.
  4. Nanny Pay Advisor.  Nanny Pay Advisor is a mobile app for Android phones and tablets or your iPhone and iPad that takes care of the most tedious and regularly recurring parts of nanny payroll, and guides you through the rest.  With a $5 a month price tag and even a free trial, you can’t go wrong to give it a try.  Download it from the Google Play Store or the Apple App Store.

What is the nanny tax?

The ‘nanny tax’ is a collection of taxes you are required by law to pay if you meet the criteria. See below to learn who each of these items apply to, and why you and your nanny should care.

Social Security and Medicare (aka FICA)

Required if you pay your nanny cash wages of $2,200 or more in 2020 (up from $2,100 in 2019). Some exceptions apply if your nanny is your spouse, your child under the age of 21, your parent, or under the age of 18; in those cases, see the Federal Household Employer Guide.

Federal Unemployment Tax (FUTA)

Required if you pay cash wages of $1,000 or more in any calendar quarter of 2020 or 2019 to your nanny. Exceptions are if your nanny is your spouse, your child under the age of 21, or your parent. Unlike Social Security and Medicare, FUTA is entirely employer paid and is not withheld from your nanny’s paycheck.

(State Dependent) State Unemployment Tax (SUTA)

Some states also impose a state unemployment insurance tax which can be in addition to FUTA or instead of it.  This is state dependent and the rate can vary by individual, depending on your household employment history.

(State Dependent) Worker’s Compensation Insurance

Some states require household employers to carry Workers’ Compensation Insurance. Even if it is not required in your state, it is still recommended to protect yourself in case your nanny injures herself while on the job. This needs to be obtained from an insurance agency. Talk to one in your area for details around local requirements, cost, and how to purchase. Your homeowner’s insurance policy may provide coverage in some scenarios, so this may be a good place to start.

(Optional) Withholding Federal and State Income Tax

Withholding federal and/or state income tax is not required of household employers. But if your employee asks you to withhold it, you can.

Due to the additional overhead on the employer to handle this case, some nanny employers choose to instead advise their nanny to estimate their tax burden for the year using a tax estimator to plan accordingly.

For federal income taxes, this can be done via the IRS Withholding Calculator or IRS Publication 505.  If your nanny expects to make enough to owe income tax, she can pay estimated taxes on a Quarterly basis via IRS Form 1040ES.

Benefits of going through all this overhead

You may be wondering why not just pay under the table? Besides being illegal, there are benefits to both employer and employee to paying legally. For the Employer, you can take advantage of tax-deferred Dependent Day Care plans offered by your employer or you may be eligible for the Child and Dependent Care Tax Credit, as well as not having to fear an IRS audit and worry about legal repercussions. For your nanny, she will be accruing Social Security, be eligible to collect unemployment, and have record of job history to build up credit.

References

See the complete Federal Household Employers Guide at https://www.irs.gov/publications/p926/ar02.html

Download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

Classifying a nanny as an Independent Contractor – What not to do

One question we often hear is whether a nanny can be classified as an Independent Contractor.  The appeal of this idea is that it would allow you as an employer to skip paying FICA taxes (Medicare and Social Security).  However, the nanny would instead be the one to pay those taxes, which would be filed with Form 1099 when she pays her yearly income taxes.

However, federal law is clear that a nanny who works in your home should not be classified as an independent contractor.

So rather than classifying your nanny as an Independent Contractor, the correct thing to do is to treat yourself as a Household Employer by issuing your nanny Form W-2 and sharing the FICA tax burden with your nanny.

Now this classification distinction only matters if you will pay your nanny or babysitter $2,100 or more in 2018, up from $2,000 in 2017.  If under this amount, then FICA taxes will not apply.

For a checklist of how to pay your nanny legally, see here.  This information is also included in the Nanny Pay Advisor Android app and the Nanny Pay Advisor iOS app.

For more information about classification of a household workers, see the IRS website.  An excerpt from Pub 926 is provided below.

Do You Have a Household Employee?

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it doesn’t matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also doesn’t matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.

Example.

You pay Betty Shore to babysit your child and do light housework 4 days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.

Workers who aren’t your employees.   If only the worker can control how the work is done, the worker isn’t your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.  A worker who performs child care services for you in his or her home generally isn’t your employee.  If an agency provides the worker and controls what work is done and how it is done, the worker isn’t your employee.

 

Nanny Tax changes for 2018

In 2018, paying employment taxes becomes required by law once a babysitter, nanny, or other household employee earns $2,100 in a calendar year.  This is an increased amount from 2016 and 2017, when the limit was $2,000.

On the other end, the cap for Social Security tax is now at $128,700 for 2018.  In 2017, this was $127,200.  Wages above these amounts are not subject to Social Security tax, but are subject to Medicaid tax.

Also, many states and cities have increased their minimum wage, with most increases between 15 cents and $1.00.  New York City leads the pack with the biggest jump in minimum wage rates. NYC minimum wage for employers with 10 or less employees jumped $1.50 from $10.50 in 2017 to $12.00 in 2018.

What hasn’t changed:

  • The rates of Medicare and Social Security taxes remain unchanged from 2017.
  • Federal minimum wage remains at $7.25 per hour, where it has been since 2009.
  • It is still tax evasion to avoid responsibilities if you do meet the requirements to be considered a household employer.

Download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

How much can you pay a nanny without paying taxes?

In 2020, you can pay a nanny or babysitter up to $2,200 in a calendar year without worrying about taxes.  This is up from $2,100 in 2019.

If you pay more than that, you may be considered a household employer. If so, then you are responsible for FICA (Social Security and Medicare Tax) and Unemployment Insurance taxes.  There are exceptions to this if the caregiver is your spouse, parent, or child under the age of 21.

This calculator will help to quickly estimate your nanny’s income to determine if you would be over the $2,200 amount in a year.

Download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

 

Back to school surprise! You may owe taxes on your after school babysitter.

When you have school-aged children and the dog days of summer are winding down, back to school season also brings a new routine.  This may mean a babysitter or nanny for before or after school care, or both, during the school year.

If you are a household employer and pay $2,100 or more in 2019 to a nanny or babysitter in a calendar year, then you are responsible for FICA and Unemployment Insurance taxes.

Here is a quick calculator to help determine if you will owe these taxes.  Notice the $2,100 minimum is per calendar year and not school year.  So if you only use your nanny for the fall, you may not have to worry about these taxes. But if you also paid your babysitter earlier this year, this may put you over the lower threshold.

 

Don’t let taxes get you in the doghouse!

Download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.

 

 

Cost of a Summer Nanny

When your kids are out of school for the summer, getting a nanny can be a convenient option.  There is no stress of getting kids out the door in the morning or dealing with drop-off or pick-ups. And if you are lucky, your nanny may even be able help out with errands or get the kids involved to help with dinner prep.

There are also many college students looking for summertime employment, so it is often a win-win arrangement.

And if you have multiple children, a nanny could even end up being cheaper than a day care center or camps.

How much should I pay a Summer Nanny?

The hourly rate for a nanny in the US is typically between $10 and $20 per hour. And some areas can average even higher – I’m looking at you, California.  The factors that most affect the actual rate are:

  1.  Location.  The going rate in an area will have the biggest influence on pay rate.  To get an idea of going rates in your area, see here.
  2. Number of children.  The more children will generally yield a higher pay rate.
  3. Prior experience.  Nannies with previous nanny experience will command a higher rate than a nanny with no prior experience.

Also don’t forget about overtime.  Labor laws require that you pay at least 1.5 times regular pay rate for any time beyond 40 hours a week.  You can read more about how to handle overtime in this post.

Total Cost of a Nanny

If you are weighing your options as to whether to get a nanny for the summer or enroll your children in a day care or summer camp, comparing the total cost can be useful.  The total cost of a nanny is more than just the hourly rate, however.  Don’t forget to factor in food, activities, taxes and other overhead when comparing costs.

For example, say you were paying $15/hr for 30 hours a week for 10 weeks.  You could do the simple math to estimate $4,500.  However, the other hidden costs in the example below add $1,300 on top of that.

Try entering in the cost and hours for your situation.  How does the total cost compare to your other summertime options?

Wait, do I really need to pay Taxes for my Summer Nanny?

Most likely.  It actually depends on how much you will pay your nanny over the entirety of the year.  If you pay more than $2,200 gross during the year to your nanny, it is considered tax evasion if you do not pay the appropriate ‘nanny tax’.

The good news is that some of this cost can be offset by tax breaks.  Your employer may provide a Flexible Spending Account for dependent care which allows you allocate pre-taxed dollars to pay for child care.  Or, you may be eligible for the Child and Dependent Care Tax Credit.  Those tax breaks could be used in the other situations like a day care center or camps.  One case it could not be used in, however, is if you pay your nanny under the table.

For more details on the Payroll options mentioned in the calculator, see http://www.nannypayadvisor.com/blog/comparison-nanny-tax-payroll-services/.
Or download our handy app from the Google Play store for Android devices or the App Store for iOS devices to automatically calculate taxes and withholdings, track time, create & email pay statements and guide you through your tax responsibilities.