Many nanny-related websites address tax and employment issues from the employer’s viewpoint. We believe it is equally important for you, the nanny, to understand the tax and employment issues that affect you. If you have any questions that are not answered in this section, please let us know. We’re working to make AllAboutNannyCare.com the best nanny resource on the web.
A special thanks to Tom Breedlove of Breedlove and Associates. He generously contributed his expertise to several entries on this page.
NOTE: While we make every attempt to provide up-to-date and accurate information, the information on this page is not intended to substitute for professional legal or tax advice.
Independent Contractors vs. Employee
Working for Your Employer’s Company
Gross Wages vs. Net Wages
On The Books vs. Under The Table
Minimum Wage
Overtime
FLSA, What It Means to You
Determining the Salary or Raise You Need
Taxes Your Employer Must Pay
Taxes a Nanny Must Pay
Taxes Your Employer Withholds on Your Behalf
Are My Employers Doing What They Need To?
The Paperwork
Tax Software / Payroll Services
Direct Deposits
Workers’ Compensation
Pregnancy
Firing
Unemployment
Employer Subtracting Expenses from Your Last Paycheck
Bad References
Health Insurance
Extra Insurance Needed When Nanny Uses Her Own Car for Work
Nanny Contracts / Nanny Work Agreements
State / City Laws that Pertain to Domestic Workers
Independent Contractors vs. Employee
An independent contractor is a self-employed person who is responsible for all employment and income taxes owed, including the full contribution for Social Security / Medicare. For you to fit into the legal definition of an independent contractor, you must control how the work is done and offer your services to the general public in an independent business. Some employers distort their nanny’s job definition in an attempt to define her as an independent contractor, hoping to stay within the law while avoiding all employer responsibilities. However, the IRS has addressed this issue by clearly stating that a nanny is not an independent contractor (see page 2 of publication 926). For more information, download IRS publication 926.
Working for Your Employer’s Company
Some employers list their nanny as an employee of a company they own rather than a household employee. Nannies often see this as a plus because it usually comes with group health insurance, something unavailable to the individual nanny. However, pretending to be a receptionist or a file clerk in your employer’s company is not a good idea. If caught (and it is much easier to get caught than you might think), you can be prosecuted for fraud and forced to repay all the benefits you received posing as an employee. This includes payments made to you and on your behalf by medical and auto insurance companies.
What about the argument that a nanny is essential to a company? “A nanny is not considered a ‘direct contributor’ to the business enterprise (and the IRS has heard -- and ignored --the argument that the childcare is critical to the business because it frees up the executive to run the company...). The IRS says no...if she provides childcare, the company cannot claim her as an employee because there are business tax deductions on payroll. Since she is not a direct contributor to the business, the business cannot take those tax deductions. Instead, the household employer gets tax breaks on their personal income tax returns for these childcare expenses. If she (the nanny) does some office work just to get around this law (i.e. a little filing, answering phones, etc.), the IRS says she should be paid on the company books for only those hours; her childcare hours must be paid through the household employer's personal bank account.”
~ Tom Breedlove of Breedlove and Associates
Gross Wages vs. Net Wages
Gross wages are your wages before any taxes are withheld. Net wages are your wages minus any taxes withheld.
On The Books vs. Under The Table
Nonpayment and underpayment of required taxes is a huge problem within the nanny industry and is not limited to caregivers working illegally in this country. There are a large number of American nannies working fully or partially off the books. This poses obvious legal problems for employers but also denies the individual nanny earned benefits and lowers the professionalism of the industry as a whole.
So what are the advantages of being paid on the books? First, you’ll be obeying the law which eliminates the fear of being “caught” by the IRS. Second, you’ll have access to the benefits offered to legally employed individuals. You’ll build your Social Security retirement and disability account, be entitled to collect unemployment if ever fired, be entitled to collect workers’ compensation if ever hurt on the job, and be able to use your income to acquire and build credit.
Remember, if you only claim one-third or one-half of your actual income, that amount is what your unemployment, disability and borrowing power will be based on. Many highly paid nannies have been forced to rely on barely-there unemployment benefits while looking for another job, been denied car and home loans or been unable to rent an apartment because their reported income was much less than what they were actually bringing home.
Getting Caught ~ Who Foots the Bill?
When taking a job, most nannies understand if they’re paid under the table they won’t be able to collect unemployment if fired or workers’ comp if hurt on the job. At the time, those possibilities seem very remote. However those possibilities often become a reality. When that happens, nannies are faced with the financial hardship of being fired without notice or being required to personally pay for work related medical expenses. Under the pressure, nannies often consider applying for benefits believing the myth that the family, not the nanny, will bear the legal and financial penalties for not paying taxes.
The truth? If an employer is caught not paying the required employment taxes, he will owe back Social Security / Medicare taxes, both his part and his nanny's part, and back unemployment taxes plus interest and penalties. However, the nanny will owe back federal and state income taxes plus interest and penalties which could easily add up to thousands of dollars.
Minimum Wage
Under the Fair Labor Standards Act (FLSA), all nannies, live-in and live-out, must be paid the federal minimum wage of $5.85 per hour. Some states have set a higher minimum wage and in those states, the higher standard applies. To find out what the minimum wage is in your state, click here.
Overtime
Under the Fair Labor Standards Act (FLSA), live-out nannies are eligible to receive overtime after 40 hours of work in 1 work week (7 consecutive days). The nanny must be paid at a rate of not less than 1.5 times her regular rate of pay. This law applies to all live-out nannies, whether they agreed to a set salary or an hourly rate. The overtime requirement cannot be met through comp time. Some states have stricter overtime (premium pay) laws and in those states, the higher standard applies. To find out what the overtime laws are in your state, click here. Live-in nannies are generally not subject to overtime wage laws. The exception is New York state where live-in nannies must be paid time-and-a-half for any hours over 44 in a 7-day work week.
Fair Labor Standards Act (FLSA) and What It Means to You
The overwhelming majority of nannies and employers negotiate a nanny’s wages in the real world terms of salary or hourly rate based on the nanny’s typical work week (usually between 45 and 65 hours) rather than the FLSA 40 hour work week. Before agreeing to a salary or hourly rate, it is your responsibility to ensure it meets legal requirements. If you’re not sure, you can call Breedlove and Associates’ free help line (888 273-3356) for a breakdown.
EXAMPLE A live-out nanny that works 55 hours per week agrees to a salary of $550 per week or $10 per hour. In FLSA terms, the nanny earns $352 or $8.80 per hour for the first 40 hours and $198 or $13.20 per hour for the next 15 hours equaling $550 a week. This DOES meet all minimum wage and overtime requirements.
EXAMPLE A live-out nanny that works 60 hours per week agrees to a salary of $400 per week or $6.67 per hour. In FLSA terms she earns $228.57 or $5.71 per hour for the first 40 hours and $171.43 or $8.57 per hour for the next 20 hours equaling $400 a week. This DOES NOT meet the minimum wage requirement of $5.85 per hour.
However, a live-in nanny that works 60 hours per week for $400 per week or $6.67 per hour DOES meet FLSA requirements because live-in nannies are not legally entitled to an overtime wage. She is paid $6.67 for each of the 60 hours worked.
NOTE: In every area of the country, the average wage for a quality in-home caregiver is above the minimum wage. In larger metropolitan areas, well above the minimum wage. If your hourly wage doesn’t meet minimum requirements, I strongly urge you to reevaluate your compensation package. If you provide a quality caregiving environment, you deserve to be paid a competitive wage for it.
Determining the Salary or Raise You Need
Professionalism is a word that we hear often in this field. As nannies, we strive to be taken seriously and to be treated as more than babysitters. During the past years, we've come a long way. However, when we register with an agency or negotiate with a family and talk of "take home" pay rather than gross wages, we undermine our own efforts. In the rest of the world, it is a given that taxes will be withheld from an employee's paycheck. No one assumes that the amount they are paid per hour or per week is the amount they will bring home. Why is this industry different? We cannot expect others to treat in-home childcare as a real job until we do. We need to change our language. We need to negotiate our salary as the rest of the world does: in terms of gross dollars. This shows that we not only view ourselves as professionals but we expect others to view us the same light.
Breedlove and Associates provides a quick and accurate resource for nannies negotiating a salary or raise. Their take-home pay calculator tells you what you need to make in gross salary in order to take home a particular amount. If the initial amount you enter results in a take home pay that is less than you need, simply work through the process again using a higher amount. When you know what your gross salary must be for you to be happy, you can go into a negotiation more knowledgeable, more confident and more likely to get what you want.
The tax amount listed on the calculator include Social Security, Medicare, federal and state taxes. If you live or work in NYC, you are also responsible for city taxes. If you are a resident (live in any of the 5 boroughs) you will owe 2 ½ to 3% of your gross salary to the city. If you live outside the city but work in any of the 5 boroughs, you will owe 1½ to 2% of your gross salary to the city. Most employers do not withhold NYC taxes so make sure you set aside the amount owed on a regular basis. Otherwise you will find yourself facing a hefty tax bill at the end of the year.
There are also municipalities in PA and OH that have local income taxes. Call Breedlove and Associates for more information.
Taxes Your Employer Must Pay
Employers are responsible for contributing to your Social Security / Medicare account (7.65%) as well as federal and state unemployment insurance, and in many states, workers’ compensation. (See Workers’ Compensation section below for exact state requirements.) This usually adds up to an additional 9% to 11% of your gross salary. So if you earn $500 a week, the total cost of your salary to your employer would be $545 to $555 a week. Of the extra $45 - $55 per week your employer pays in taxes, $38.25 goes into your Social Security/Medicare account.
Taxes a Nanny Must Pay
Working as a nanny is just like working any other job. You’ll owe Social Security / Medicare, federal, state and in certain areas, county and city taxes. The amount of taxes that are withheld from your paycheck depends upon the information you provide on IRS Form W-4. If you provide accurate information, the amount of taxes withheld will be close to the actual amount owed, resulting in a small refund or small balance due at the end of the year.
Taxes Your Employer Withholds on Your Behalf
Your employer is required to withhold your half of the Social Security / Medicare tax (7.65% of your gross wages). However they are not required to withhold your federal, state, county, and city taxes although the majority of employers do. If you employer does not withhold these taxes, you are responsible for paying estimated taxes 4 times during the year. To calculate your federal estimated taxes, download IRS Publication 505, Tax Withholding and Estimated Tax. To calculate your state estimated taxes, contact your state’s taxation division for the appropriate forms. These are fairly complicated processes and may require you to hire a tax service or accountant.
Are My Employers Doing What They Need To?
Your employer is legally required to provide you with a pay stub. The information that must be listed on the pay stub varies slightly from state to state but virtually every employer will list your gross wages and the amount of taxes withheld. Check your pay stub carefully to make sure your employer is reporting all of your wages and withholding the appropriate taxes. Do not wait until the end of the year to verify that your employer is reporting your wages and withholding taxes. If for whatever reason your employer withholds the taxes from your paycheck but then fails to pay the taxes to the IRS and / or appropriate state agency, your employer will bear the responsibility for the unpaid taxes. Your pay stubs will serve as proof that you paid the taxes listed.
Need help understanding your pay stub? Click here for an explanation of common terms and abbreviations.
The Paperwork
Before you begin a new job, you’ll need to fill out a IRS Form W-4 which will help your employer calculate the amount of taxes that should be withheld from your paycheck.
With each paycheck, your employer is required to provide you with a pay stub detailing the wages you’ve earned and the taxes he’s withheld.
At the end of the year, your employer is required to provide you with a W-2 form detailing your wages earned and taxes withheld for the entire year. You should compare these figures to your weekly pay stubs to make sure your W-2 is correct.
Tax Software / Payroll Services
Many employers use nanny tax software or a payroll service to deal with all aspects of their nanny taxes. This is the easiest way to ensure your taxes are being handled appropriately. If a prospective employer sounds unsure of how to handle your taxes, be proactive and suggest a software program or payroll service. Most employers find the fees are well worth the time and frustration saved. For detailed information on payroll services and nanny tax software, check our Tax Services Directory.
Direct Deposits
Even if your employer doesn’t use a payroll service to handle your pay, in most cases he can still have your regular paycheck directly deposited into your checking account. Your employer will need to present a voided check or deposit slip from your checking account to his bank’s representative. The representative can then set up the automatic transfer. Direct deposit means you’ll never have to ask your employer for your check again. However your employer chooses to pay you, direct deposit or simply handing you a check, he is still responsible for providing you with a pay stub.
Workers’ Compensation
Workers’ Compensation is a state-mandated form of insurance covering workers injured in job-related accidents. In some states the state is the insurer; in other states insurance must be acquired from commercial insurance firms. Some states do not require employers of domestic workers (nannies) to carry workers’ compensation insurance. To find out if your employer is exempt due to state laws, contact your state’s insurance department and ask if your state requires employers to provide workers’ compensation for “domestic” employees and if so, what are the requirements for this coverage to be mandatory. Some states may require an employer to employ a certain number of employees and other states may require the domestic employee to work a minimum number of hours.
If your employer is required to carry Workers’ Compensation and doesn’t, his homeowners insurance policy will not pay for any fines, court awards or any other penalties assessed against him.
You are entitled to Workers’ Compensation if you suffer a "personal injury by accident arising out of and in the course of employment." Workers’ Compensation covers loss of wages, usually about one-half to two-thirds of average weekly wages, medical and death benefits.
These laws are strict liability – fault, and negligence by the employer need not be established in order to collect benefits. In exchange for the assured benefits, you give up your right to sue the employer for any injury covered by workers' compensation laws. However, if a third party's negligence helped cause the accident, you can still sue the third party; any proceeds from the suit must first be used to reimburse your employer for any benefits paid.
Pregnancy
Unfortunately, the federal and state laws that prevent pregnancy discrimination and provide for mandatory leave require an employer to have a minimum number of employers, excluding pregnant nannies from their protection. However if your employer is paying the required employment taxes and offers you an unpaid maternity leave, you are entitled to collect disability benefits during that time.
Firing
The majority of states are "at will" states, which mean an employer has the ability to terminate, discipline, transfer, or demote you at any time, with or without reason, at the sole discretion of the employer. In other words your employer can fire you whenever he wants, for whatever reason he wants to give. He isn’t legally required to give you a preliminary warning or notice. Common reasons nannies are legally fired are…
* being unable to work because of sickness
* taking off work for a family emergency
* refusing to take a salary cut when a child goes to school
* personality clash between nanny and employer even though the nanny is doing her job
In most states, an employer cannot fire you because…
* you filed a Workers’ Compensation claim. However you can be fired if you’re unable to work due to the injury cited on the claim.
* you are required to serve on a jury, as long as you give your employer advance notice. In most states, employers are allowed to withhold wages during the full period of your jury duty. Other states provide some right to payment. To find out how much payment is required, contact the state or county agency listed on your jury summons.
There are a few additional state imposed reasons an employer cannot fire you although most don’t apply to the typical nanny situation. To check your state’s firing restrictions, contact your state’s unemployment agency.
Unemployment
If you are fired, you are probably entitled to unemployment benefits. However, if you were fired for misconduct, violation of a specific work rule or violation of an “unwritten rule” that you could be expected to know, you will most likely not receive any benefits. Poor performance or incompetence is not usually considered misconduct and will not usually stop you from receiving benefits.
If your employer “changes an aspect of your working conditions that makes it virtually impossible for you to stay” and you quit, you may still be able to collect unemployment benefits due to Constructive Discharge.
Each state has a different formula for determining the minimum needed to obtain benefits in that state. Most of the states require that the employee worked at least some part of two different calendar quarters within the past one and one-half years, and a large percentage of states also have a specific dollar amount of wages that must have been earned. To find out your state’s requirements, contact your state’s unemployment agency.
Remember, unemployment benefits have their limitations. They take 4 to 8 weeks to begin, only provide you with a percentage of your regular wages and are taxable benefits.
Employer Subtracting Expenses from Your Last Paycheck
Most states have laws requiring that employees be paid whatever they have earned, and paid on time. Employers may not legally deduct expenses such as relocation costs paid by the family (typically airfare), long distance bills or the repair cost of broken items from your paycheck. However, if they have a legitimate and fair claim to payment, they can attempt to collect the debt through the court system.
Bad References
Because employment references play an important role in hiring decisions, the law usually protects an employer who in good faith discloses information that the employer believes is true to a prospective employer or other person who has a legitimate interest in receiving the information.
A nanny can take legal action against a former employer giving false information during a reference. The nanny must generally prove that the communication, spoken or written, was defamatory, the communication was made in reckless disregard of the truth or with the knowledge of its falsity and injury resulted. If you feel you have a solid defamation case and are willing to invest the time, energy and money to see the case through, you should contact an employment lawyer.
In a majority of the states, an employer's "blacklisting" of a former employee is a crime. The laws generally are broad enough to cover any communications that are designed to prevent former employees from securing employment. If you feel a former employer is blacklisting you to local placement agencies or parents, contact your local district attorney.
Health Insurance
If your employer pays for your health insurance, it is a tax free benefit to you. Your employer can pay the premium directly to your insurance company or pay the premium directly to you so you can pay the insurance company. If your employer pays the premium directly to you, you should provide your employer with a copy of your premium notices for their records.
Extra Insurance Needed When Nanny Uses Her Own Car for Work
If you use your own car for work purposes, transporting children or running errands, your state or your insurance company may require you to carry a professional use rider on your personal car insurance policy. If you’re required to carry the rider and don’t, your insurance company can deny any claims from accidents occurring on work time. To find out if a rider is required in your situation, contact your insurance representative. Make sure you explain in detail the type of work you do to ensure the coverage you receive meets the requirements for a in-home caregiver, not a commercial childcare center driver.
Nanny Contracts / Nanny Work Agreements
Although “nanny contract” is the common term used for documents such as our A to Z Nanny Contract, these documents are not legally binding contracts although they do serve as detailed evidence of the verbal agreement between nanny and employer. Employers that don’t fill their financial obligations to the nanny as outlined in a work agreement can be sued in small claims court through a fairly easy and inexpensive process. Employers that have broken the commitments made in a work agreement generally will be required to pay their nanny the money owed her.
State / City Specific Domestic Workers Laws
Unfortunately, most federal, state and city employment laws don’t pertain to domestic workers. However, there are some city laws that do extend their coverage to domestic workers. Those laws are listed below. Know of a law not on our list? Email us with the details and we’ll add it. Include your name and contact information if you’d like to be listed as the source.
CALIFORNIA
San Francisco’s Paid Sick Leave Ordinance
San Francisco's paid sick-leave law applies to anyone with employees who work in the city, including private individuals with household employees.
The law requires employers to provide one hour of paid sick leave for every 30 hours worked. Employees can use the time for their own medical needs or to care for a family member or "designated person." The law covers both full-time and part-time staff, temporary as well as permanent workers. It takes effect once an employee has been onboard for 90 days, and requires employers to keep records of leave accrual and use for four years.
For more information, visit San Francisco’s Office of Labor Standards Enforcement website.
NEW YORK
Overtime Required for Live-In Nannies
In New York state, live-in nannies must be paid time-and-a-half for any hours over 44 in a 7-day work week.
For more information, visit State of New York, Department of Labor.
Information on this law contributed by Breedlove and Associates.
