With summer right around the corner and schools getting ready to let out, many working moms are scrambling to find childcare. However, one aspect of babysitters you may not realize is that, legally, you do have to pay taxes on them. Why? Short answer: they are considered household employees per the IRS definition in IRS Publication 926.
So what does that mean? Legally, you are required to pay state and federal unemployment taxes, FICA, and Workers’ Comp. It’s a huuge hassle to get it figured out (trust me – been there, done that), but once you have it set up, it’s seamless and (plus side) you’re completely legal (helloooo, tax audits).
“Well, my babysitter is going to act as an independent contractor.” Ha. Nice try. The IRS is all over that. They explicitly exclude childcare workers in your own home as independent contractors, as you “control not only the work they do but also how they do it.”
Okay, so now that I’ve (hopefully) convinced you to pay the taxes, how do you go about doing that?
Let me break it down for you.
- First, register for an Employer ID Number (EIN). This can be done online at here. You’ll need that to set up other accounts and to pay taxes.
- Make sure to give your babysitter a W-9 form to fill out. This just documents their name, address, and social security number.
- After you have those both configured, set up an account with Ohio’s Workers Comp as a household employer. How much you have to pay into this is dependent on how much you pay in wages. This is paid yearly, so you only have to remember to do it once. You can set up your account and make payments online at here.
- If you will pay them more than $2,100 in the current tax year (2018), plan to pay FICA taxes (social security and medicaid). If you pay them less, don’t worry about it. You will still have to pay the other taxes, but at least get a break on FICA. The trick with FICA is both you and your nanny are responsible for paying, just like with you and your employer. The nanny’s portion is 7.65% of his/her income (1.45% to Medicare and 6.2% to Social Security), but you are also responsible for an additional 7.65%. Most people choose to withhold the nanny’s portion from his/her paychecks and then pay both portions. These can be remitted at any time and with any frequency, but I recommend paying quarterly instead of just one lump sum. It helps take away a little bit of sticker shock, as this is the biggest amount you’ll pay in taxes. These can be paid online as well, here.
- If you pay the babysitter more than $1000 in wages, you will also have to pay federal unemployment taxes (FUTA). This is only 0.6% paid on the first $7,000 of wages and can be paid when you file your federal income tax return.
- You also need to pay state unemployment taxes (SUTA). This has to be paid quarterly. The rate for this is variable, but is around 3%. This is also paid online via Ohio’s ERIC portal here.
- You do not have to withhold your nanny’s state or federal taxes, and most people don’t. That adds unnecessary complications to calculating wages, and that’s something he/she is responsible for filing herself when tax time rolls around.
- You will have to provide your babysitter with a W-2 before the January 31 deadline, and also submit a Form 1040 Schedule H on your federal taxes.
If that all seems like too much of a hassle, there are service and software to help. NannyPay is a popular software, and Care.com will also help with tax withholding. However, both of them charge for the service, and I just wasn’t really willing to pay for something I could handle on my own (call me cheap).
I used this as my guide and also worked with an accountant to make sure we were doing everything correctly. I do recommend you double-check your own setup with an accountant, because I am definitely not one. I’m just a mama who always follows the rules (I reeeeally don’t like getting in trouble) who was too cheap to pay a service fee, but feel free to hit me up with any questions!