10 Tips to Avoid Nanny Tax Problems

Unless you’re a CPA, chances are you don’t relish the prospect of additional work at tax time. So you’ll want to take some steps to avoid nanny tax problems before they arise. We’ve put together a list of ten tips you can use to avoid problems with you nanny’s taxes.

1. Stay Above the Table – For starters, forget about any benefits you may think you would both gain from cash payments, and skirting the tax issue entirely. The risk is hardly worth the savings, and the penalties are far greater.
2. Taxpayer Benefits – If your nanny prefers a particular take-home pay, or net salary, you will want to determine which taxes that amount will exclude. In other words, decide up front if the net salary you agree to will be before or after you pay her Social Security and Medicare, etc.
3. Know the Laws – You don’t need to be a lawyer, but it’s wise to understand the tax laws with regard to your obligations as an employer. In most cases if you hire a nanny, you are going to be responsible for collecting her Social Security and Medicare taxes. That is, deducting them from her paycheck each pay period, and issuing her a W-2 form for filing her income taxes.
4. Discuss Taxes With Nanny – Make sure that both you and your nanny are on the same page regarding what taxes need to be deducted and why, and estimate the amounts in order to avoid surprises later.
5. Know Her Legal Status – You should already have determined whether she is legally authorized to work during the hiring process. Only citizens, permanent residents or non-immigrants who possess a work visa may be legally hired for work. In any case, you will still be liable for her taxes. The difference is that she would have to file a form W-7, request for an Individual Taxpayer Identification Number (ITIN).
6. Know What Forms to File – Aside from the aforementioned W-2, you must also file an SS-4 application for an Employee Identification Number (EIN); and, if you pay her cash in excess of $1,600, a Schedule H form.
7. Know Your Deductions – Be certain about which expenses you incur by having a live-in nanny are tax-deductible. For instance, food and lodging that are provided to a live-in nanny at the convenience of the employer, are eligible for tax-exemption.
8. Working Agreement – For many reasons it’s strongly advised that you write up a working agreement between you and your nanny at the time of hire. One of the benefits of doing so is that it will include the details of her salary, overtime and other factors that will affect her income, as well as what taxes each party will be responsible for paying.
9. Disclosure – Remember that you are required to disclose on your own personal income tax return the amount of wages you paid your nanny.
10. Keep Accurate Records – maintain a log of your nanny’s work schedule. Document the hours she works, including overtime, overnight work and any duties outside her normal responsibilities as well as whatever compensation you paid her for it.

Taken From Nanny Pro