So, youve hired a nanny. Unlike your 15-year-old niece who charges you $10 an hour and as much of the ice cream in the fridge as she wants to watch your kid for an evening, your nanny is a professional and should be paid as such. That means accounting for payroll items such as taxes and benefits. This provides long-term protections and bonuses for both you and the person youre employing. The nanny gains access such benefits as Medicare and Social Security, while you know that you have everything buttoned up including nanny taxes come April 15th.

So how do you pay a nanny the right way and what paperwork needs to be filled out? Heres what you need to know.

If youre planning to pay your nanny more than $2,200 year or an average of at least $183 per month you need to pay taxes. And, yes, you should pay them. In fact, both you and your nanny are in a better position when you pay and report taxes with tax breaks for you and benefits for them. Its also the law.

We do it not just to follow the law but because it is the morally right thing to do, says father and employment law expertMichael Oswalt, Associate Professor at Northern Illinois University College of Law. Nannies are employees, not independent contractors.

Because all of our employment protections hinge on employment status, Oswalt adds, misclassifying a nanny denies them the few safety net protections that exist. In-home care work is already precarious and often poorly paid, he says. Misclassification compounds the vulnerability. Why do that to anyone especially to someone caring for your child?

Paying nanny taxes qualifies your nanny for healthcare subsidies, unemployment benefits should they lose their job due to no fault of their own (i.e. a pandemic), verifiable employment history for applying for loans, and Social Security and Medicare for when they retire.

In addition to potential tax savings, paying nanny taxes lets you rest easy that the IRS wont come knocking. If you get caught for not paying like when your former nanny applies for unemployment after your kid enters school full-time and the unemployment office sees you havent paid any taxes you can expect an audit, back taxes plus penalties and interest, and potentially tax evasion charges.That doesnt end well for anyone.

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Now that youre convinced you should pay nanny taxes, theres a bit of paperwork to tackle. While it depends, the most likely scenario is that paperwork is needed for both Federal and State taxes.

Many employment laws vary by state, so the protections provided by employee status can differ, Oswalt says. For instance, in Illinois where Oswalt resides, he is required to provide their nanny with paid sick leave. Thats not true elsewhere.

A service likeCare.coms HomePaywill take care of most of the details (direct deposit, generating the W-2, apportion all the taxes, tell you if you need to buy workers comp, etc.), but if youre going the DIY route, its important to follow these steps:

1. Get an EIN and Fill Out an I-9, a W-4, and a State Withholding Form

As your nannys employer, you need a federal Employer Identification Number (EIN).Apply for one online.Your nanny should fill out anI-9, afederal W-4 form (PDF), and a state withholding form if your state collects income tax.

2. Pay Your Nannys Salary

Tally your nannys hours, multiply it by their hourly rate, and add overtime pay to get the gross (pre-tax) amount you owe. Subtract Social Security and Medicare taxes, income taxes, and any other state or local taxes that may apply generally about 10 percent of gross pay. The net is your nannys take-home pay, so cut that check.

3. Pay Nanny Taxes

What you deducted from your nannys pay is what you need to send to the IRS and your states tax agency.Pay your estimated federal taxes (1040) online or by maildo it every three months to avoid underpayment penalties and interest. Your states requirements may differ, so double check them and pay that, too, if necessary.

4. Prep for Tax Filing

Once the year ends, youll need to complete a few more forms for Aprils tax deadline. Provide your nanny aW-2 for their income tax returns andfile a W-2 Copy A and W-3 with the Social Security Administration. You may also need to fill out an Annual Reconciliation Form if your state requires it. Finally, youll need to submit aSchedule H, which allows you to report household employment taxes, with your federal income tax return.

Are you using a nanny share service to split childcare costs with another family? Youll both need to follow the steps above to establish yourselves as household employers with the IRS and your state, pay the nanny separately, and withhold and remit the appropriate taxes to the IRS and state. And make sure the combined rates youre paying add up to the minimum wage in your area.

Following the rules when it comes to paying a nanny or caretaker fairly and by the books ensures that they receive all the legal benefits of the work they do. These employees often become members of the family; its important to see that they are given the most you can give.

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How to Pay a Nanny the Right Way - Yahoo Lifestyle

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