YOUR Connection
to Professional Childcare in Ohio
Household Employer Tax FAQ
A Complimentary Resource from GTM Payroll Services Inc. To learn more, or to receive a free consultation, please visit https://gtm.com/household/nanny-connection/
As a household employer, do I have to pay taxes on my employee?
Answer – Yes. As a household employer, if you pay cash wages of $2,600 (2023) or more to your employee, you must withhold Social Security and Medicare taxes. Employers are not required to withhold Federal and State income taxes unless it is agreed upon by both parties. If income taxes are not withheld throughout the year, your nanny will be responsible for paying them at the end of the year. If you pay above established government required threshold or more per quarter to a household employee, you must pay federal unemployment tax.
My friends pay their nanny/ household employees off the books. Can I?
Answer – According to IRS Publication 926, employers must withhold taxes if their employee earns $2,400 (2022) Gross. It is each individual employer’s responsibility to withhold taxes according to this. GTM strongly recommends that you review the tax laws regarding household employment.
What are the risks of non-compliance?
Answer – By not paying payroll taxes, the employer risks being investigated by the IRS which could result in hefty fines of $25,000-$100,000, penalties, and potential jail time. They will also be responsible for the payment of all back employment taxes, interest, penalties, and will not be eligible for tax breaks like the Dependent Care Assistance Program or the Child Tax Credit. Additionally, if you are in a state that requires workers’ compensation insurance and you do not pay taxes, you cannot obtain the insurance and as a result, if your nanny becomes injured on the job you could be responsible for her lost wages and medical expenses. Paying taxes for your household employee allows you to take advantage of a flexible-spending plan by using their salary as a qualifying expense.
Can I treat my household employee as an independent contractor?
Answer – No. There are specific differences between an employee and an independent contractor. An employee is a person who takes instruction from the employer, has a schedule set by the employer, and uses tools and equipment provided by the employer. An independent contractor is a person who works under their own conditions, sets their own schedule, and uses their own supplies. Most nannies who work in an employer’s home, whether it be on a temporary or full-time basis, are considered household employees, not independent contractors, because they work under the family’s control and have their schedule and pay set by the family. In the past, the IRS has made determinations that caregivers are considered employees and it is illegal for a family to treat them as independent contractors.
I own a business. Can I put my household employee on my payroll?
Answer – No, it is illegal to pay your household employee on your business payroll. A household employee is an employee in your home, not your business and therefore would not qualify you to take the tax deductions which you would be allowed to take with a traditional business employee. In most cases, federal household employment taxes must be paid on the employer’s personal federal income tax return, either annually or quarterly. The only exception to reporting federal household employment taxes on the employer’s personal federal income tax return is if they are a sole proprietor or if their home is on a farm operated for profit. In either of these cases, the employer may opt to include federal household employment taxes with their federal employment tax deposits or other payments for the business or farm employees. For more information, refer to IRS Publication 926.
Should I talk to my employee in terms of Gross pay or Net pay?
Answer – It’s always best to talk in terms of Gross pay for several reasons:
Your employer taxes are based on top of the gross wages, making budgeting easier
Tax tables change on average once a year, so there is no guarantee that the net that you agree on with the employee will remain the same
Overall, it is less costly for you to speak in terms of gross pay because your employee’s taxes are deducted from the gross wages rather than being added on top of the net.
Can you explain the specifics of a nanny share?
Answer – We highly recommend creating a work agreement in order to document the requirements of the position. A work agreement establishes a clear understanding between the employer and employee regarding the employee’s duties and responsibilities, and all that is expected from both. Lack of a work agreement can contribute to confusion, dissatisfaction, and a high turnover rate. For more information, refer to How to Hire a Nanny by Guy Maddalone.
What if my employee cannot provide documents for the I-9 form?
Answer – As the employer, it is your responsibility to provide an I-9 form to your employee within 3 days of hiring. It is also your responsibility to review the documents received from your employee to ensure they are valid and not expired. If your employee is unable to provide the documents needed to support the proof of their work authorization legally, you should not hire them. If you are unsure of the eligibility of your employee, you can always verify the information they have provided using the E-Verify program at www.uscis.gov.
Am I required to pay overtime?
Answer – According to the U.S. Department of Labor, the federal Fair Labor Standards Act (FLSA) requires employers to pay overtime pay of one and a half times the regular pay rate. Overtime pay must be paid for work over 40 hours per week. However, some live-in nannies are exempt from overtime depending on the state in which they are employed. Employees hired to provide baby-sitting services on a casual basis, or to provide companionship services for those who cannot care for themselves because of age or infirmity, are exempt from the FLSA’s minimum wage and overtime requirements, whether or not they reside in the household where they are employed. State and local laws for overtime vary and may supersede the federal FLSA law. Consult a certified professional at GTM for more information by calling (888)432-7972, or contact your state’s Department of Labor for your state’s specific laws. A household employer should specify in the work agreement when approved overtime can occur and what the specific rate of pay will be to avoid conflict when the issue arises. Click here to estimate these costs usingGTM’s Overtime Rate Calculator.
Am I required to provide vacation or other paid time off to my employees?
Answer – While vacation and other paid time off is not a requirement, it is a popular benefit provided to household employees and is a major contributor to job satisfaction, according to many nannies. All time off payments should be agreed upon by the employer and employee prior to hiring, and should be clearly defined in both the work agreement and employee handbook.
Do I have to provide worker's compensation insurance?
Answer – Most states require household employers to carry a workers’ compensation policy depending on whether your employee works part-time or full-time. This type of policy will provide compensation to an employee who is injured on the job. Even if your state does not require it, GTM strongly advises you to obtain coverage for your employee. GTM Employment Benefits, LLC is a licensed insurance brokerage that specializes in setting up workers’ compensation policies for household employers. Contact GTM Employment Benefits at (800) 432-7972 x 7213 to explore your options and see if GTM can help you in obtaining this policy.
What tax breaks do I receive?
Answer – There are two main tax breaks that can offset your employer tax costs. If you are legally employing someone in your home (paying “on the books”), you will be able to take advantage of one of the two following tax breaks:
Dependent Care Assistance Program (DCAP) – Most companies provide this benefit and allow employees to contribute up to $5000 of pre-tax earnings to a Dependent Care account. You would then be reimbursed these tax-free funds to cover childcare expenses.
Child and Dependent Care Tax Credit
– For those who don’t have access to a Dependent Care Account, you can claim the Child and Dependent Care Tax Credit (Form 2441) on your personal income tax return at year-end. You can claim up to $3,000 of the un-reimbursed qualifying child care expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. The credit can be anywhere from 20% to 35% of your qualifying expenses.