5 Tax-Related Things to Do When You Hire a Nanny

Here's what you need to know when hiring a nanny and becoming a household employer, including paying taxes, paying your nanny legally, and reducing financial risk.

Have you recently hired a nanny or are you in the process of hiring one? There are a few things you’ll need to do to ensure you are protected as the employer and your nanny is protected as an employee—from benefits and payroll to taxes and insurances. One of the most overwhelming aspects of hiring a nanny is filling out all the necessary paperwork, figuring out how to pay her the right way, and ensuring taxes are paid correctly, so neither of you get in trouble with the Internal Revenue Service.

 As a household employer, you have year-round responsibilities, but for now, here are five short-term items to take care of between the time you hire your new nanny and when he starts working for you.

Apply for Federal and State Tax ID Numbers

The IRS and the state of New York require you to establish your Employer Identification Numbers, so you can begin sending in employment tax returns on a regular basis. You can apply for your Federal Employer Identification Number through the IRS and get your state EIN through the New York State Department of Labor.

Have Your Nanny Fill Out Income Tax Withholding Forms

In order to accurately withhold federal, state, and New York City (if you live in one of the five boroughs) income taxes from your nanny’s paycheck, she’ll need to complete two tax withholding forms:

• Form W-4, which will let you know how much in federal income taxes to withhold from each paycheck
• Form IT-2104, which will cover the state and local income tax withholdings

Note: Income taxes are not required by law to be withheld from a nanny, but it’s highly recommended so your nanny doesn’t risk underpayment penalties or get stuck with a large tax bill at the end of the year.

Give Your Nanny a Wage Notice Before the First Day of Work

State law requires you to provide your nanny with a written Wage Notice at the time of hire. The notice must include:

• Your name, address, and phone number
• Your nanny’s hourly rate of pay
• Overtime rate of pay (if applicable)
• A confirmation that your nanny will be paid weekly
• The day of the week your nanny will be paid
• Number of paid days off your nanny will receive each year (you must provide at least 3 after the nanny has worked for you for 1 year)
• Number of paid sick days your nanny will receive each year (if you live in NYC, your nanny must receive at least 2 after he’s worked for you for 1 year)

Your nanny needs to sign this Wage Notice and keep a copy for her records. You must keep the original for 6 years. This information can easily be placed in a formal nanny contract. If you drafted one up during the interview process, make sure all the state-required information above is included.

Purchase a Workers’ Compensation and State Disability Insurance Policy

Household employers in New York are required to carry workers’ compensation and disability insurance on full-time nannies (40 hours or more per week) and all live-in nannies. Though having these isn’t tax-related, per se, making sure you are covered will minimize financial risk for both you and your nanny. These two pieces of insurance are vitally important to your nanny because they provide financial assistance when he is unable to work due to injury or illness. Plus, the state can levy heavy fines to families that are caught without coverage.

Even if it’s not required in your situation, it’s still a good idea to have workers’ compensation, in particular, because you can be found liable for your nanny’s medical bills and lost wages if she gets hurt or sick while on the job. Both workers’ compensation and state disability insurance can be purchased through the New York State Insurance Fund.

Ask Your Human Resources Department About Enrolling in a Flexible Spending Account

The best tax break families have available to offset the cost of hiring a nanny is a Dependent Care Account—a type of Flexible Spending Account offered through most employers. It allows you to pay for up to $5,000 in child-care expenses with pre-tax dollars. On average, this can save you approximately $2,000, which significantly offsets the tax liability you’ll have as a household employer. Even if you’ve missed Open Enrollment, you may still be able to sign up: A change in child-care expenses (i.e. hiring a nanny) usually allows you 30 days to enroll in an FSA. Talk to your HR representative to make sure your company follows this policy.

   
Handling all of this is a lot, but the effort is worth it because both you and your nanny benefit from paying legally:

• You may be eligible for the tax breaks just mentioned.
• You don’t have to worry about being audited by the IRS and owing thousands of dollars in back taxes and fines.
• Your nanny builds credit with the Social Security Administration toward eventual retirement benefits, may be eligible to receive unemployment benefits, gains a verifiable employment history, and may receive reduced health care costs.

If any of this feels—or gets—overwhelming for you to manage, you may want to consider outsourcing it to a household employer payroll service, such as Care.com HomePay. These services typically help household employers with preparing and filing all tax documents, run a payroll, and offer HR support.