According to the IRS, your nanny is just one person out of a handful of people found in the category of “household employees”. Your housekeeper, gardener, babysitter, nanny, caretaker, private nurse and maid (if you are so lucky) are all your employees, if you direct them (like a boss) and they work for you at your home.
As their employer, the IRS expects you to pay Social Security, Medicare and unemployment tax. Plus your state Labor Department expects you to report wages and to pay unemployment taxes too.
Are you surprised?
When you step over to the employer side, you must pay employment taxes, because both the employer and the employee pay these taxes. As the employer you have payroll responsibilities, such as reporting your employee’s wages and making quarterly tax payments.
But wait, there is an exception for Social Security and Medicare: if you pay your employee less than $2,000 in 2016, the wages are within an exception and these taxes are not due. This is great if you hire an occasional babysitter but for others, such as caregivers who provide more regular services and are likely paid more than $2,000, this exception is not available.
You generally have three ways to address the payroll hurdle:
1. Hire from an agency, where they handle the payroll tax reporting,
2. Get payroll assistance, for instance through Paychex or Care.com HomePay, or
3. Register and file the payroll reports yourself.
Under the first method with an agency, you are the client not the employer and they fulfill the payroll reporting requirements. After this obvious advantage, you also have more coverage for services. For instance, if your caregiver gets sick, they have other staff that can fill in. But as might suspect, hiring your caregiver through an agency will cost more.
Under the second method of working with a payroll service, you are the employer and the payroll company collects taxes (from you), makes quarterly payments on your behalf and prepares required reports for you to sign. You have the payroll help, but as the employer, you are still the “boss” and control the caregiver services. Just be sure to use a reputable payroll service and hire wisely.
Under the third option, you will need to do your homework. To get started check out the IRS.gov website, Topic 756, and your State Labor Department’s website, for NH search: Department of Employment Security, services for employers.
Here is a quick list of the actions needed for self-payroll reporting:
1. Apply for an employer id number with the IRS.
2. Get Form I-9 and W-9 completed by your employee.
3. Get registered with your State Department of Labor.
4. Report and pay quarterly unemployment taxes.
5. Report annual wages and pay employment taxes.
While it may seem overwhelming, getting you payroll responsibilities taken care of is a relief. And this task gets easier as you learn more about the reporting. Please contact our office if you have additional questions.