Many of the entries on this page contain information pertaining to tax and / or legal issues. While we make every attempt to provide up-to-date and accurate information, this information is not intended to substitute for professional legal or tax advice.
Independent Contractors vs. Employee
Your Nanny Working for the Business You Own
On The Books vs. Under The Table
When Employment Taxes Become Necessary
Taxes You Must Pay as an Employer
Options for Handling Your Employer Taxes
Workers’ Compensation
Fair Labor Standards Act (FSLA) ~ Minimum Wage
Fair Labor Standards Act (FSLA) ~ Overtime
Fair Labor Standards Act (FSLA) and What It Means to You
Tax Breaks for Nanny Employers
State / City Specific Domestic Workers Laws
Return to Parent FAQ Index
Independent Contractors vs. Employee
The IRS has clearly stated that nannies are employees of the parents they work for, not independent contractors, because they do not control how the work is done or offer their services to the general public through an independent business. For more information, see page 2 of IRS publication 926.
Your Nanny Working for the Business You Own
Some employers consider listing their nanny as an employee of a company they own rather than a household employee. This is often seen as a plus for both parties. Employers save money on employment taxes and nannies often receive benefits usually unavailable to in-home caregivers. However, pretending your nanny is a receptionist or a file clerk in your company is not a good idea. If caught (and it is much easier to get caught than you might think), you and your nanny can be prosecuted for fraud.
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
On The Books vs. Under The Table
Paying your nanny fully or partially off the books poses clear and unavoidable risks to you. The IRS considers this tax evasion and if caught, you’ll be responsibility for back taxes, interest and penalties. You’ll also be exposed to the public scrutiny that comes with avoiding the nanny tax. If you’re a licensed professional, you’ll face the possibility of losing your license and livelihood.
Also, your nanny will be denied the many benefits that come along with being paid legally. She’ll won’t build her 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, or be able to use her income to acquire and build credit.
Don’t think getting caught is a real possibility? Nannies faced with the financial hardship of being fired or being required to pay for work related medical expenses often apply for benefits whether their employers have paid taxes or not. A simple form listing you as an employer can bring years of avoiding employment taxes into the spotlight.
When Employment Taxes Become Necessary
The IRS states that anyone who pays a household employee wages of more than $1.500 (for 2007) during the calendar year legally must report and pay social security and Medicate tax and comply with all state and federal tax laws. For more information, see page 2 of IRS publication 926
Taxes You Must Pay as an Employer
Employers are responsible for contributing to their nanny’s 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 nanny’s gross salary. So if your nanny earns $500 a week, the total cost of her salary would be $545 to $555 a week. You can quickly calculate your tax liability for a particular situation by contacting a nanny payroll service like those listed in our Tax Service Directory.
Options for Handling Your Employer Taxes
There are several options for handling your nanny taxes. You can handle the taxes yourself, use nanny tax software, a payroll company or individual accountant. The choice you make really depends upon your comfort level with tax issues and the time you have to invest in paperwork and preparation. To find a service that meets your individual needs, check out our Tax Service Directory.
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 you are 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.
Danger! If you’re required to carry Workers’ Compensation and don’t, your homeowners’ insurance policy will not pay for any fines, court awards or any other penalties assessed against you. If you aren’t required to provide Workers’ Compensation, we strongly encourage you talk to your homeowners’ insurance agent to ensure your homeowners’ policy will cover injuries to domestic employees while on duty.
Fair Labor Standards Act (FSLA) ~ 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.
Danger! 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. A good nanny will quickly leave a job that pays so far below the market average.
Fair Labor Standards Act (FSLA) ~ 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 (FSLA) 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.
Tax Breaks for Nanny Employers
Many companies offer Dependent Care Accounts / Flexible Spending Accounts that allow employees to contribute pretax earnings that can then be used to cover childcare expenses.
If your company doesn’t offer this benefit, you can claim the Tax Credit for Child or Dependent Care on your annual income tax. You can take up to 35% of qualifying childcare expenses depending upon your income, up to $3,000 for one dependent and $6,000 for two or more dependents. For more information, read IRS publication 503.
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.
