The Nanny Tax Part 2: How and When to Pay It

The nanny tax is a tax that many families know about but few actually pay. Part of the problem is the confusing nature of this tax and understanding what your family’s obligation actually is if you have a household employee.  Part one of this post explained what the nanny tax is and how to determine if you are required to pay it  (Hint: if you are paying your nanny more than $1700 per year, you should be filing taxes on her). I sat down with tax and business consultant Bonnie Yormack, principal of  New York-based Lynn-Mark Tax & Business Consultants, to find out more about the nanny tax. Bonnie also happens to be my tax preparer and has given me much good financial advice over the years. Here is part two of my interview with her:

There are so many people who are paying their nannies and part-time baby sitters “under the table” – should I really be concerned with paying these taxes?
Yes. It’s the right thing to do and it’s the law.  Any individual whom you employ to provide services in your home whom you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold ($1700 in 2011) must receive a W-2 from the employer (family) and you, the employer, must pay the payroll taxes

How do I file taxes on my nanny? Do I need to hire an accountant or can I do it on my own?
Your  nanny payroll taxes are added to your family’s personal income tax liability. Most families with full time staff will make quarterly payments of the nanny payroll taxes using 1040ES estimated tax payment coupons. The Internal Revenue Service (IRS) collects the nanny payroll taxes. They are summarized annually on the family (employer’s) Form 1040 Schedule H – an attachment to your family’s personal federal income tax return. Separately, as the employer, you are typically required to register for and make quarterly payments of state unemployment taxes. These unemployment taxes are paid to the state where the work is physically performed. You can file these taxes on your own or you can choose to hire an accountant.

Where can I learn more about the nanny tax and what my obligations are?
Go to your state website and IRS website to learn more or speak with your accountant.

What’s the biggest tax mistake you see your clients make year in and year out?
Some household employers forget to make quarterly estimated tax payments. If this happens, they may get substantial underpayment penalties at year end should the total family income tax + nanny payroll tax liability be too large.

If someone would like tax preparation services or financial advice, what’s the best way to get in touch with you? Please visit my website www.lynnmark.com; email me at taxquestions@lynnmark.com or call me at (212) 213-6592.

For those of you looking to figure out how to pay your nanny taxes, Bonnie is a great resource. You can also check out the very informative www.nanny4hire.com, which provides a wealth of detailed information and advisory services. As for me, when I hired D2’s nanny last year, Bonnie helped me get my employer ID number and set up my quarterly tax payments. I track all of my nanny’s paychecks by month on a simple Excel spreadsheet, which I send to Bonnie at the end of every quarter. Bonnie then files my taxes and sends me our 1040 coupon, which states how much tax I owe that quarter. I write a check, mail it off and I’m done.  In the beginning I considered filing my own taxes but I can tell you that it’s far easier to let your accountant or hire a payroll service to do it for you. As a busy mom, I have enough to worry about without trying to figure out the complexities of the US tax code.  What’s your experience with the nanny tax? What other information resources do you recommend?