The hardest part of paying your nanny legally, and not under the table, is figuring out what exactly needs to be done and how. That is why full service payroll providers can charge $1,000 / year or more to do it for you. If you are not interested in paying this extra price, the good news is that you can, in fact, do it yourself.
Here is what goes into it.
One time tasks
- Agree to terms with your nanny. Consider creating a written Employment Contract, even if you are not in a state which requires one. Also known as a Nanny Contract, it can help clarify expectations and avoid conflicts. It should include things such as pay rate & pay frequency, taxes withheld (such as Medicare and Social Security), taxes not withheld (such as federal and state income taxes if you choose not to withhold them), daily duties and other expectations, and required leave notice.
Note on pay rate: Although some families want to pay a salary rather than hourly wages, be careful on this. Except for some live-in nanny situations, the Department of Labor stipulates that you must pay overtime at a rate of at least 1.5 times regular pay to time over 40 hours in a work week. For more info on hourly vs salary considerations, see this post.
- Complete an I-9 Form. Have your nanny fill out an I-9 form after they accept the job offer but no later than the first day of employment. This form indicates what documentation you as an employer need to inspect (Drivers license, SS Card, etc) to verify your nanny is legally able to work in the US. You do not need to submit this form but must retain it for your records. The I-9 form is found at http://www.uscis.gov/i-9
- Obtain an Employer Identification Number (EIN). Follow the instructions at this IRS page to register as a Household Employer to get your EIN immediately after verification.
- Register with Social Security. Prior to filing Form W-2 with the IRS in January, you will need to Register for a Business Services Online account at https://www.socialsecurity.gov/employer/. As part of the registration process, you will be mailed a password so do not wait until the final January 31st deadline to complete.
- File a new hire report with your state. File a New Hire Report with your state’s New Hire Registry. Links for all states can be found at http://www.acf.hhs.gov/programs/css/resource/state-new-hire-reporting-websites
- Get Workers’ 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 so 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.
- Other State Specific Requirements. Depending on your state, you may also be responsible for other state employment taxes, such as State Unemployment Tax. See The Unites States Department of Labor website for links to each state’s Unemployment Tax Agency.
Each pay period tasks
- Keep required work records. The Department of Labor’s Wages and the Fair Labor Standards Act (FLSA), found at http://www.dol.gov/whd/flsa/ has a Recordkeeping requirement which requires you to track hours worked, earnings, deductions, among other information. See here for more details.
- Calculate Net Pay. If your nanny will make over $2,100 in calendar year 2018, you must withhold Social Security and Medicare taxes (aka FICA) from your nanny’s paycheck, unless your nanny is your spouse, parent, or child under the age of 21. Account for this and any other necessary withholdings.
- Pay your nanny. Pay the Net Pay amount. Set aside the amount owed by Social Security and Medicare – you will pay both the employee contribution as well as the employer contribution amounts when you file your taxes.
- (If applicable) Pay State Unemployment Tax. If your state requires State Unemployment Insurance Tax, it is likely due on a quarterly basis. To find out about your state’s requirements, see http://www.workforcesecurity.doleta.gov/unemploy/agencies.asp for links to each state’s Unemployment Tax Agency.
- (If applicable) Pay Workers’ Compensation Premium. The provider of Worker’s Compensation Insurance will determine your payment amount and exact due dates, so talk to your local insurance provider for details.
- (If applicable) Pay Quarterly Estimated Tax. Instead of waiting to pay the Medicare, Social Security and FUTA the following year with your tax return, some household employers will benefit from paying these earlier on a Quarterly basis. This could be the case if your employer does not withhold enough from your paycheck and the nanny tax collected is significant enough to warrant a tax underpayment penalty. See https://www.irs.gov/pub/irs-pdf/p505.pdf for details. If you choose to make earlier payments, you can do this via form 1040ES https://www.irs.gov/pub/irs-pdf/f1040es.pdf every quarter. For 2019, the quarterly filing dates are April 15, 2019, June 17, 2019, September 16, 2019, and January 17, 2020. An alternative option to paying quarterly taxes is to have your employer withhold an increased amount from your paycheck to cover the difference.
- (If applicable) Additional State specific filings. Some states have additional quarterly filing requirements which may have been noted when you registered with your state.
- File W-2 with the IRS and send to your nanny. You will need to file a W-2 for the previous year with the IRS and send a copy to your nanny by January 31st. To generate the W-2, log in to http://www.socialsecurity.gov/employer/ and follow instructions to Report Wages to Social Security, and Create Forms W-2/W-3. Fill in with information found on the Reports page. When complete, you will able to download the form as a pdf. Email this to your nanny for use in her own tax return.
- File Form Schedule H with your tax return. When filing your own tax return, you will need to file a Schedule H found at https://www.irs.gov/pub/irs-pdf/f1040sh.pdf. This will calculate the Medicare, Social Security, FUTA, and Income taxes withheld which you will need to pay at this point. A detailed walkthrough of Form Schedule H is found in this blog post.
The Nanny Pay Advisor app for Android and app for iOS can help you with these tasks, from giving you reminders for each of these tasks so you do not forget, to generating a pay stub and keeping records, providing data required for tax filings, and more. Find it in the Play Store for Android devices or the App store for your iPhone and iPad.