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Toddlers and Taxes: How to Pay Taxes When You’re a Nanny

Being a nanny can be trying and incredibly rewarding. You are trusted to care for kids

About 3.5% of households have nannies in the U.S. If you’re one of those nannies, you’re earning an income that you’ll have to report to the IRS. You don’t want to wait until tax time to figure out how you’re going to pay taxes.

Instead, you can learn how to pay your taxes now and prepare yourself. With proper planning, you’ll avoid being one of the 30 million people to get a tax bill this year.

Keep reading to learn how you can be well-prepared and pay your taxes on time as a nanny. 

What’s Your Status?

The very first thing that you need to know when you get hired is your hiring status. Are you an independent contractor or are you a household employee?

In most cases, you’ll be a household employee. The only way you’ll be an independent contractor is if you set your own hours and days when you work.

You might think of yourself as an independent contractor, and the family you work for probably sees you that way, too. In the eyes of the IRS, though, you’re a household employee.

Housemaids, nannies, caregivers are going to be considered household employees. For people who provide a one-time service, like plumbers and repairman, are considered to be independent contractors.

This is an important distinction because if your employer pays you more than $2,100 a year, there are certain obligations that both you and your employer need to fulfill.

Social Security & Medicare Taxes

When you receive payment from your employer, they need to withhold taxes for social security and Medicare taxes, which are also called FICA taxes. If they’re using accounting software, this should be pretty easy to do.

As a nanny, you’ll have about 7.65% of your earnings withheld for FICA taxes, 6.2% for social security and 1.45% for Medicare taxes.

The employer is responsible for withholding 7.65% and paying the IRS your 7.65% plus an additional 7.65% for their share of the FICA tax.

If they treat you as an independent contractor, this is an incorrect way to employ a nanny. The employer may want to treat you like a 1099 employee because they don’t want to pay the federal withholding taxes. It’s easier for them to make you fully responsible for it.

Not only that, but you’d be on the hook for the full 15.3% self-employment tax, instead of sharing that responsibility with your employer.

The only time that you may be exempt from this is if you’re working as a nanny while going to school. The IRS usually considers being a student your full-time job, not being a nanny.

Federal Income Tax Withholdings

Here’s where things can get really tricky for nannies. Their employers aren’t required to withhold federal income taxes on their paycheck. They only will if you make the request.

If you don’t make that request, you’re obligated to pay either estimated taxes or you will have one huge tax bill at tax time. If you don’t properly plan ahead, you’ll have a big tax bill and the IRS is likely to charge an underpayment penalty. You’ll have interest to pay on top of that if you don’t pay the full amount by tax day.

You need to pay 1040-ES taxes (quarterly estimated taxes) if you expect to pay more than $1,000 in taxes during the year.

You can handle this in one of two ways. You can ask your employer to withhold federal taxes on your behalf. That would require that you fill out a W-4 form. Your employer would then withhold your wages based on the number of exemptions you put on your W-4 form. 

The fewer exemptions you have, the more money you have taken out at tax time. That will increase the likelihood that you’ll get a refund instead of owing money.

Pay Estimated Taxes

The other way to handle it is to calculate the federal withholding yourself. You can then set aside that amount of money by moving into a savings account every time you get paid.

You can then pay your estimated taxes to avoid the big tax bill at the end. If you pay too much in estimated taxes, you’ll get a refund. With estimated taxes, you want to get this number as close to what you’re likely to owe as much as possible.

The IRS isn’t a fan of people to pay way too much in estimated taxes and get a refund or underpaying taxes. The idea is to break even at tax time.

If you’re working for a nanny agency like A Nanny On the Net, then it’s likely that they pay you directly as an employee and withhold your taxes for you. You want to verify this as soon as you’re hired so you can plan appropriately.

State Income Taxes

Do you think learning how to pay your taxes as a nanny is complicated? It can be for federal taxes. Fortunately, state taxes tend to be a little easier to deal with.

The hard part is that tax laws vary from state to state. Your employer may be responsible for paying state unemployment taxes.

You’ll want to verify with them how state income taxes are handled. If you live in a state that doesn’t have an income tax, then this is a non-issue.

How to Pay Taxes as a Nanny

The law surrounding the ‘Nanny Tax’ is complicated and confusing. You can end the confusion by making sure that you’re treated as a household employee, not an independent contractor.

Your employer might disagree with you at first, but the law, and the IRS are on your side. You need to make sure that they withhold the right amount of FICA tax and they pay their fair share of taxes.

For federal and state income taxes, it’s hard to know how to pay taxes. You want to make sure that you’re taking responsibility for your withholdings and owing as little as possible to the IRS.

You may want to employ the services of an accountant to make sure that you’re set up for taxes. Read this for tips to find a great accountant