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We are planning to hire a nanny for our little one. We would…

We are planning to hire...
We are planning to hire a nanny for our little one.
We would like to pay for the nanny service through online bank transfer.
Now my question, what information do I have to collect from the nanny to be able to include the nanny expenses during income tax filing at the end of the year?
Is there any form, that I need to have it signed by the nanny?
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Answered in 1 hour by:
6/15/2017
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,040
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Welcome to Just Answer! Thank you for giving me the opportunity to assist you! I will do my best to help!

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Hiring a nanny is not that difficult from a tax standpoint. First of all, if you own a business that already has payroll and employees, then you cannot pay the nanny tax through your 1040 - you have to pay it through regular payroll withholding and file quarterly Forms 941.

Are you going to pay the FICA tax for the nanny? OR are you going to withhold it?

When you pay a nanny, and you do not have any other employees, you have to deposit the quarterly income tax withheld, and the FICA tax due (whether you pay it or you withhold it) every quarter on a Form 1040-ES. At the end of the year, you report her wages by completing a Schedule H with your Form 1040. The taxes are reported and paid with your own income taxes, but since you made quarterly deposits, there should not be a large balance due from this situation.

You will have to issue a Form W-2 to the nanny. If you pay her FICA tax, then this reimbursement is taxable income and included in Box 1 of the W-2. However, it is not Social Security or Medicare wages in Boxes 3 and 5 of the Form W-2.

I hope this answers your questions! If you have any more, please let me know and I will be happy to answer.

Thanks! Have a great week!

Roger

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Customer reply replied 10 months ago
I am little bit confused.
I am an individual. I would like to hire a nanny/babysitter for my family to look after our infant. I am not a business or company. And I do not have any employees.
I would like to pay the nanny online through bank transfer weekly/semi-monthly/monthly.
Now what should I do in terms to paying for the nanny service and filing year end tax return?

You can pay her the weekly earnings, or whatever pay schedule you agree on,electronically. That is not a problem. You asked about other forms and requirements. When you pay her, her wages are subject to Federal income tax withholding, as well as FICA tax withholding. You have to keep them out of her check and send them to the IRS every quarter on a Form 1040ES. For example, if you pay her $1,000 every two weeks, you would have to withhold some amount for Federal income tax (depending on what she claims on her W-4). You have to look at the IRS Circular E to determine the amount to withhold. The nice thing is if you pay her the same amount every pay period, you only have to look this up once.

Continuing my example, if you paid her $1,000 every two weeks, you might be required to withhold $50 of Federal withholding tax on the income. Then you would also be required to withhold $62 of Social Security tax, plus $14.50 of Medicare tax. The Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%. The total amount of withholding would be $126.50, and her net check would be $873.50. There may be state tax that has to be withheld as well.

Every quarter, you have to make a payment to the IRS for the taxes withheld, plus your half of FICA. Employers pay an amount equal to what is withheld from the employee. In this case, there would be 13 pay periods in the quarter, so you would have withheld 13 x (50 + 62 + 14.50) = $1,644.50 of withholding, plus your share of the FICA, or 13 x (62 + 14.50) = $994.50. Your total payment to the IRS is $1,644.50 + 994.50 = $2,639 sent to the IRS with the Form 1040-ES.

The nanny service can be paid their fee. This is usually separate from the weekly salary of the nanny, which is handled above.

On your personal tax return at the end of the year, you would file a Schedule H to report the taxes withheld and paid, and a Form 2441 to claim the child tax credit for yourself.

This may seem like a lot of work, and it is. That is why there are companies like ADP and Paychex that will do it for you, for a fee.

I hope this answers your questions! If you have any more, please let me know.

Roger

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Customer reply replied 10 months ago
Is it possible, that I will just pay her the service fee and she can take care of her income liability? So that I don't have to do the IRS and FICA part.

You can do that, and give her a Form 1099-MISC at the end of the year, but if the IRS catches you, you would be subject to penalties. They want their money quarterly, and they want it reported correctly. I have a client who pays a mother's helper to take care of her kids. She issues a Form 1099-MISC every year. While this is not legal, she makes sure that the woman pays in her taxes quarterly, so that the IRS is still getting her money. In this case, you would not file a Schedule H, only the Form 2441.

As I said, this is technically not legal. But people do what they want, and the IRS does not have enough manpower to catch everyone.

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Customer reply replied 10 months ago
Pretty complicated.
Taking your example, if I pay $2000 per month, then how much should I be paying extra on top $2000 quarterly and annually?
Customer reply replied 10 months ago
Also, can I make the payment through PayPal as a service provider, not as an employee? What is the advantage and disadvantage in that mode of payment?

If you pay $2000 per month, or $24,000 per year, you would have to pay her $2,000 less $200 (assumed) Federal income tax less $124 of Social Security tax less $29 of Medicare tax, for a net check to her of $1,647. Depending what state you live in, there may be a state withholding tax requirement.

You would have to deposit every quarter the taxes you withheld from her ($353 per month, times 3 months in the quarter = $1,059. Plus, you have to match her Social Security and Medicare tax, which is another $153 per month times 3 = $459, for a total tax deposit of $1518 per quarter). This $459 is the "extra" that you would pay each quarter.

You cannot make the federal tax deposits through Paypal. You can pay her through Paypal, but it does not change the taxability. You can say that she is an independent contractor (and responsible for her own taxes) but the IRS will change that if they catch you. In order to see if someone is an employee or an independent contractor, they look at control. Your nanny will be working at your house, watching your kids, during the hours you set. She will be following your directions and be under your control. She is definately an employee.

If you print out a Form SS-8, you can look at what the IRS uses to decide employee or independent contractor. If you classify her as an independent contractor, where she pays her own taxes, and the IRS catches it, they can assess the tax plus a 100% penalty on you. So the cost of noncompliance is steep. They do it that way on purpose to make sure people file correctly. I know it is easier to just pay her without worrying about the tax, but if you get caught, the steep cost of the penalties can offset any savings that you may have.

Now, I cannot tell you whether or not the IRS will ever catch you. I am just letting you know the facts.

If you have more questions, please let me know.

Thanks!

Roger

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Customer reply replied 10 months ago
Does it mean, every independent contractors we will hire as needed basis for any kind of house work services (e.g. house keeping, carpet cleaning, house cleaning etc.) we will be considered as their employer and have to pay tax to IRS from our side rather they being taking care of their own earnings? We are not hiring them as an employee. We are just paying for their service.

No, then you hire a carpet cleaner, you hire them from an ad where they advertise their services as working for others. They may work with many different people on any given week. They can use their own equipment, their own techniques, hire their own employees, etc. You control only the end product, not the process. You are only paying for the end result.

Your nanny, on the other hand, works only for you. She may have a few others that she occasionally babysits for, but you are her main work. She has to personally perform the services. She cannot hire others to take her place. She uses your home, your toys, your diapers, your food, your everything. She does not hold herself out as someone who provides nanny services to the general public. She is doing this only for you.

Do you see the difference? I am a CPA. I do tax returns and accounting for hundreds of clients. I am in independent contractor. Twenty years ago, I worked as a CPA for a business. I was their international tax supervisor. I went to work every day, I was paid a regular salary, I had a boss to answer to. I was an employee. Before that I was a CPA for a large CPA firm. While I worked on many clients, I had a boss at the firm that I answered to, I worked in their office, using their computers and equipment. I was again an employee.

Do you see the difference? An independent contractor is just that - independent. They work for many people. They control their own destiny. The more hours they work, the more money they can make. Your nanny is not this. Your nanny works for you. She only provides nanny services to you. You control her work product. She answers to you. You control her. She is an employee.

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Customer reply replied 10 months ago
I need, Form SS-8 now and at the end of the year I have to provide Form 1099?
Is there any free payroll service that I can use to pay for the nanny service that will take care of quarterly taxes to IRS directly and other taxes? So that I do not have to worry separately.
Also, if I spend more than $20000 annually for the nanny service, then how it can benefit us for tax return? Does it make much benefit?
Please advise.

No, you do not need the Form SS-8. I just told you to get it so you can see what the IRS looks at to determine if someone is an employee.

I am not aware of any free payroll services. You can contact Paychex or ADP, they are large national firms, to see what they would charge for monthly payrolls. But I am not aware of any free ones. Many people hire payroll services because of the complexity of the process.

Spending $20k on a nanny will not give you much tax benefit. You are allowed to take the first $3,000 per child times a factor related to your income. Since you have the means to hire a nanny, I am guessing that your AGI is over $43,000, which allows you to take the maximum 20% of the first $3,000 per child, or $600 as a tax credit. IF you have two children, this is a $1,200 tax credit.

I tell my clients who have nannies that they need to look at the expense as the cost for great child rearing. They cannot do it for the tax credit, it is not worth it.

taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,040
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Customer reply replied 10 months ago
Got it. Thank you so much for making me understand and clarifying in detail.

I am glad to help! IF you have any future questions, please feel free to ask for me.

Roger

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