I’m used to paying babysitters in cash, where my responsibilities begin and end in one night. How the heck do I hire a full-time nanny without ending up in jail for tax evasion?
Scared of Jail
Dear Scared of Jail,
Great question! Many families feel overwhelmed by hiring a household employee for the first time. There’s a lot to take on:
Tax & wage reporting:
- Register for federal and Illinois state tax accounts
- Complete and file a New Hire Report
- Calculate the correct amount of federal and state taxes to withhold each pay period
- Track gross pay, net pay, federal and state taxes withheld, and federal and state employer taxes
- Prepare state employment tax returns on a regular basis and remit employer and employee taxes
- Assemble 1040-ES vouchers and remit federal taxes to the IRS four times per year
- Submit year-end tax forms (W-2, W-3, Schedule H and State Annual Reconciliation)
- Respond to IRS and state tax agency notices
Labor law & insurance:
- Written Wage Notice (employment contracts)
- Overtime and other Wage & Hour Law responsibilities outlined in the FLSA
- Paid sick leave and paid time off (varies based on your county)
- Workers’ compensation insurance
- Mileage & expense reimbursement
While it may be tempting to avoid all that and just pay cash, you can legally compensate your nanny relatively easily by using the payroll service of your choice.
(Our favorite nanny and household payroll and tax service is HomePay because they handle all of the paperwork and actual filing for you. They also have awesome customer support that will ~hypothetically~ answer your endless stream of questions around the clock.)
Benefits of paying your nanny on the books (for you):
- You get a tax break at the end of the year.
- You don’t need to stress about getting audited.
- If your employer offers a Dependent Care FSA, automatic pre-tax deductions can be taken from your paychecks to help pay for childcare.
- If someday your former nanny files for unemployment benefits and lists you as her past employer, the unemployment office will see that you didn’t file any tax returns or pay into the state unemployment insurance fund and trigger an audit (and she’ll be denied the benefits she wanted in the first place). You’ll end up having to pay back taxes (Social Security, Medicare, and unemployment insurance) plus penalty and interest fees. Not fun.
Benefits of getting paid on the books (for nannies):
- You can qualify for unemployment benefits if you lose your job due to no fault of your own.
- You’ll be eligible for Social Security and Medicare when you retire.
- Loans won’t be an issue because you’ll have a verifiable employment history.
If you’d rather worry about anything other than nanny tax obligations (🙋), we strongly recommend signing up for the nanny payroll service of your choice. Again, we love HomePay, but encourage you to explore your options.
Ask DNB Team