Tax nanny: Why household employers shouldn’t give a 1099 to a nanny or caregiver
Why household employers shouldn’t give a 1099 to a nanny or caregiver
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The tax differences between household employee vs. independent contractor are very important
While you may think of your nanny or in-home caregiver as more of an independent contractor than your employee, the fact of the matter is the government usually says otherwise. In almost all cases, nannies and other types of caregivers are considered household employees under the law. We’ll explore this topic further by covering:
- The IRS’ explanation for employee vs. independent contractor
- What the Department of Labor says about this topic
- How taxes differ for employees and independent contractors
- What can happen if you misclassify an employee
The distinction between a household employee and an independent contractor is the most common question we get from families. And since it has a large impact on your taxes, we want to explain this topic fully so you know exactly what to do with your nanny or caregiver:
How does the IRS distinguish between household employee vs independent contractor?
The IRS can help you determine whether a worker is an independent contractor or employee if you or your caregiver sends in a Form SS-8. The form goes through five sections of questions to determine which party (family or caregiver) has control and independence. Admittedly, the IRS says it can take up to six months to get an answer and most families will not want to wait that long.
“We’ve spoken to the IRS in the past about nanny and senior caregiver employment situations and they have ruled in almost all cases that household workers should be classified as employees,” says Tom Breedlove, Sr. Director of Care.com HomePay.
The reason why the IRS almost exclusively favors in-home caregivers as employees is because the family has control over the schedule their caregiver has to work, the duties they must perform, and they have the ability to hire back-up care if their caregiver is unable to work on a particular day.
An independent contractor, on the other hand, would be dictating to you when they’re available to work, would have specific procedures for how they will do their job, and would have a network of contacts to fill in for them if they had to miss a day on the job.
How does the Department of Labor define an employee versus an independent contractor?
Like the IRS, the Department of Labor (DOL) can pursue employers that are not following the law. The DOL looks to the Fair Labor Standards Act to give guidance on whether a worker is an employee or an independent contractor and there are different criteria for both distinctions. The Department of Labor has seven factors to consider when classifying a worker, but for household workers, two stand out the most:
– The permanence of the job. When an employee accepts a job, they will continue to be employed until their employer lays them off, terminates them with cause, or they quit.
An independent contractor has a set of duties they will perform over a certain timeframe and it’s understood that they will leave when the job is complete.
– Economic dependence. An employee is generally dependent on their job for financial stability. Independent contractors are self-employed so they are providing their services to several different clients at the same time. Losing one client is not ideal, but will not generally cripple their business.
“This distinction may be part of the reason why employees are eligible for unemployment benefits if they’re laid off due to no fault of their own, but independent contractors are not,” adds Breedlove.
How do taxes differ for household employees and independent contractors?
When you hire a nanny, senior caregiver or other household employee, you must give them a W-2 to file their personal income tax return. Independent contractors are given a Form 1099 to handle their taxes.
Aside from tax forms, managing a household employee is a year-round process because there are tax and payroll-related procedures to follow. With independent contractors, these tasks are not necessary, which is why some families purposefully misclassify their caregiver.
What happens if I provide a 1099 for my nanny or caregiver instead of a W-2?
Attempting to classify an employee as an independent contractor by giving them a Form 1099 is considered tax evasion in the eyes of the IRS. If you’re caught, you’ll owe all the back taxes you should have been paying to the IRS and the state during the time you had a caregiver and be subject to additional fines. The IRS, Department of Labor and the majority of states have signed a formal Memorandum of Understanding to share information between agencies in order to combat worker misclassification.
Aside from avoiding tax-related headaches, there are more benefits to properly classifying your household employee.
You may qualify for tax breaks that can lower your care costs and you’ll help your caregiver because the paystubs you provide help them qualify for things like car loans and mortgages. And if you’re worried about the administrative tasks, our nanny tax service can take these items off your plate so you’ll gain peace of mind.
Your Next Steps:
- Hire a nanny
- Figure out how much to pay your nanny
- Create a nanny contract
* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.
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2023 nanny pay rates: How much should I pay my nanny?
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The average nationwide is $17.
35 per hour, but learn what goes into a nanny’s pay rate and how you can find accurate salaries in your area
Once you’ve made the decision to hire a nanny to care for your kids, the next step is figuring out how much you should pay them. If you’ve never hired a nanny before, this can feel a little overwhelming. However, we’ll cover several topics that should help you come up with a realistic pay rate for your nanny.
- The current hourly pay rates for nannies in your area
- What to take into account to fine-tune your nanny’s pay
- Other costs associated with hiring a nanny
What is the current hourly pay rate for a nanny in my area?
To get a baseline for how much a nanny earns in your city, Care.com is a great resource to turn to. Based on the millions of job posts on the site, here are the 2023 average hourly nanny pay rates in several major cities.
| City | Average Pay Rate | City | Average Pay Rate |
|---|---|---|---|
| Atlanta | $19. 00/hr. |
Nashville | $17.60/hr. |
| Austin | $19.00/hr. | New York City | $21.60/hr. |
| Baltimore | $17.60/hr. | Philadelphia | $17.80/hr. |
| Boston | $21.20/hr. | Phoenix | $18.60/hr. |
| Charlotte | $17.60/hr. | Pittsburgh | $17.00/hr. |
| Chicago | $19.80/hr. | Portland | $18.80/hr. |
| Dallas | $17.80/hr. | Sacramento | $18.40/hr. |
| Denver | $18.40/hr. | Salt Lake City | $17.00/hr. |
| Detroit | $16.80/hr. | San Diego | $17.80/hr. |
| Houston | $18.20/hr. | San Francisco | $22.00/hr. |
| Los Angeles | $20.80/hr. | Seattle | $20.40/hr. |
| Miami | $17.00/hr. | St. Louis | $17.20/hr. |
| Minneapolis | $17.40/hr. | Washington, DC | $20. 20/hr. |
If you don’t see your city on this list, you can use Care.com’s calculator to see the estimated rate in your city. Keep in mind, these hourly nanny pay rates assume a nanny caring for one child and working full-time. If your care needs are different, you should decrease or increase this rate.
What should I take into account to adjust my nanny’s hourly pay rate?
Now that you have a good estimate of what the average nanny expects to earn in your area, you need to look at the details of the job you’re offering and the credentials of the nannies you’re interviewing to fine-tune the final pay rate. Here are four major factors to consider:
1. How many children your nanny will care for. Nannies that watch multiple children should earn more than nannies watching one child. Best practices are to increase your hourly rate $1 to $2 per hour for each additional child a nanny cares for.
2. How much experience your nanny has. According to the International Nanny Association’s most recent salary benefits survey, nannies with less than two years of experience earn about $2 less per hour than nannies with 3-5 years of experience. Additionally, a nanny with 7-10 years experience earns about $2 per hour more than a nanny with 3-5 years of experience. The point is, the more experience a candidate has, the more you can expect to pay for their services.
3. Whether your nanny is first aid or CPR certified. If so, they most likely should command a higher hourly rate than a candidate with no medical training. The added peace of mind knowing your nanny can provide a basic level of support for your child if something goes wrong is generally worth paying extra for.
4. Any job responsibilities that go beyond caring for your kids. Some families ask their nanny to pitch in with additional household help, such as laundry and running errands.
If you’re planning to ask your nanny to handle things like this, expect them to want additional money for these tasks.
What other costs are associated with hiring a nanny?
By now, you should have a good idea of what to pay your new nanny. But there are other expenses aside from payroll that you need to think about to finalize your total care budget.
– Household employment taxes. Sometimes called nanny taxes, these will be about 10 percent of the wages you pay your nanny. The IRS says when you pay a nanny $2,600 or more during the calendar year, you’re responsible for paying these taxes.
– Workers’ compensation insurance. Your state may require you to have a policy in place to protect you and your nanny if they get hurt while on the job.
– Tax and payroll service. Many families either don’t have the time or the desire to manage all the tax filings, payroll calculations, labor law compliance updates and government notice correspondence that come with being a household employer.
Using a nanny tax and payroll service like HomePay should be part of your budget if you need help. Give us a call at (888) 273-3356 for a free consultation and we’ll walk you through any questions you have!
Next Steps:
- Use a budgeting calculator to figure out your tax costs and tax breaks
- Learn about how to set up payroll for your nanny
- Read about the specific tax and payroll rules the IRS has for hiring a nanny
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90,000 Tutors, nannies and even taxi drivers. All self-employed will have to pay taxes
August 08, 2018
21:10
The self-employed will pay taxes at a rate of 4%. Such details were disclosed by the Federal Tax Service. It seems that the long dispute about who should be classified as this category of citizens, and how much of their income they should pay to the budget, is nearing an end.
The self-employed will pay taxes at a rate of 4%.
Such details were disclosed by the Federal Tax Service. It seems that the long dispute about who should be classified as this category of citizens, and how much of their income they should pay to the budget, is nearing an end.
Most often, the category of self-employed includes people who work without any registration. These can be cleaners, nannies, governesses, tutors, workers in the sphere of domestic services. As well as freelancers: freelance journalists, insurance agents, taxi drivers, cargo carriers. There are many such people in Russia, but most of them are not officially registered.
“In Russia, there are officially 1,661 self-employed units. But, in principle, to be frank, no one knows this. And the fork, according to our expert estimates, is from 10 to 20 million,” says Vladimir Buev, president of the National Institute for Systemic Studies of Entrepreneurial Problems .
Until the end of this year, there are tax holidays for housekeepers, nurses and tutors.
They are allowed to work without registering a legal entity or obtaining the status of an individual entrepreneur. The rest must file an annual declaration, pay personal income tax at a rate of 13%, or register as individual entrepreneurs. This requires the payment of insurance payments to the funds, as well as reporting. With the transition to a new taxation regime, the self-employed will be relieved of the need to submit reports and will be able to pay less taxes. They will have a flat rate of 4%.
“With regard to the new taxation regime, citizens can, without any additional registration, going to the tax authority or visiting any registration authorities, through a mobile application, by downloading it, pay tax. By choosing, of course, voluntarily this taxation regime,” – explains the deputy head of the Federal Tax Service Dmitry Grigorenko.
The Ministry of Finance adds that the self-employed will not only have to install a mobile application, but also undergo biometric identification.
“An appropriate account is opened and, in fact, all relations with the tax office end there. When some services are provided or some kind of sale is underway, they are sent electronically and, in fact, the income that the citizen received is recorded. From this income, you can immediately pay taxes by linking a bank card, for example, this can be done with just one click, or in an agreement with the bank, this will generally be done automatically,” adds Grigorenko.
With the introduction of the new regime, the self-employed will not be required to pay contributions to the Pension Fund. They will be able to do so voluntarily in order to buy the required number of points for the contributory pension, or to join the individual pension capital system when it is created. If the self-employed choose not to pay any contributions, they will be entitled to a social pension. The government will make a final decision in the fall. In pilot mode, this proposal will start working next year in four regions: Moscow, Moscow region, Kaluga region and Tatarstan.