Babysitters/nanny, how do you handle taxes...

rockcity

rockcity

everyday is a chance to get better
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Apr 10, 2005
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Greenville, NC
How does everyone handle taxes with babysitters and nannies?

We will have a full time nanny starting next week, 45hrs a week, for our twin girls.

Child care is tax deductible so we'll obviously write it off on our taxes. But, how would we set it up with IRS, etc.?


I'm sure we could do it under the table but if we are writing the care off on our taxes, this really isn't an option. So, how do you all handle this? I'm sure there are multipe options out there.

I did find this... http://www.irs.gov/publications/p926/ar02.html

Seems to me like it almost would be easier on everyone to ignore writing off the household employee/child care on taxes and just pay cash...

Rob
 
1099 her is the only way I know of....
 
Actually, she would be a household employee, not a subcontractor. I guess I could set up a "contract" with her as an outside contractor....?
 
Talk to your accountant....

you have to meet certain criteria to be 1099 and I dont think a household worker falls in that category.

If she has her own business taking care of kids then she would be a 1099.

Again, I would advise talking to your accountant before she starts.
 
OK lets say that hypothetically there are 2 people that are not 100% law abiding citizens and do not always appropriately report expenses and income to the IRS... and wish to explore their options... this is just hypothetical, I'm not advocating anything here.... ;-)

The payer of child care can deduct the cost from their AGI. So it reduces taxable income by the % of the bracket they fall into (or rather, the % bracket that this amount of % falls into). One could estimate this in annual $$ pretty easily.

Meanwhile, the provider has to pay income tax on that $$. Plus FICA. And since this is likely "self employment income" then that person pays the whole bigger FICA. Calculate that annual $$.

Sooo... which total amount of $$ is bigger? what the payer saves, or the provider pays?
Chances are that the provider is paying more to the IRS, but that depends on what bracket each falls into.
So, if this is the case, then if the payer were to take the "normal" wage, and subtract what they would save from it, and offer THAT to provider on the auspice of "don't ask, don't tell", then... well that's less paperwork for everybody and at least 1 person is saving $$.

One downside to this hypothetical arrangement is that it makes it difficult to use company-provided Flex Benefits spending accounts, etc. And, at least 2 people are tight lipped about their arrangement.
 
....and then she could work for you for 3 years under the table, get pizzed off at you for some reason (fired or whatever) then she can go to the IRS and say she worked for you for three years and you didn't withhold any taxes...guess who is on the hook with the IRS, if she doesn't meet the 'independent contractor' definition?

Had this happen to a client of mine. It wasn't pretty.
 
she would not fall under the 1099. according to the IRS, she would be a "household employee" and I would need an Employee Identification Number, pay the employer FICA tax, withold FICA and medicare tax, unemployment tax, federal tax, state tax.....

Just by looking up on the tax charts, it looks like paying all those taxes will be cheaper than avoiding all of it and not writing off the nanny costs.
 
My last employee I ran thru a temp agency. I found him, then made a payroll deal thru the temp company. They did all the taxes and stuff, for 5% premium. Well worth it. (Especially when it came time to cut him loose...he was the temp agency's employee, not mine...I just had to say 'bye'.)
 
oooh, if she's an employee, and contracted for 45 hrs a week you're probably looking at overtime for those last 5 hrs too.
 
RatLabGuy said:
oooh, if she's an employee, and contracted for 45 hrs a week you're probably looking at overtime for those last 5 hrs too.
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correct...


well, filling out a fake tax return (turbo tax...) we only get a very low credit for these expenses, so we'll still have to pay income taxes on 95% of the $$$ paid to our household employee. kind of pissy if ya ask me but thats the IRS :rolleyes:


looks like we get hit pretty hard. no or very little deduction on our taxes on these expenses (nearly $25K/year), pay FICA and FUTA, etc. ugh!
 
I don't quite understand why she has to be an employee of you, as opposed to having her own business and you are paying for childcare from her as a service.

then you could get the full deduction etc.
 
She has to have autonomy in order to be a contractor.
 
Shawn said:
She has to have autonomy in order to be a contractor.
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yes - but I guess I don't see why that's not possible.
That's the way that everybody I know that have in- or out-of-home private childcare does it. Provider has a business, you contract with them for service.
 
RatLabGuy said:
I don't quite understand why she has to be an employee of you, as opposed to having her own business and you are paying for childcare from her as a service.

then you could get the full deduction etc.
Click to expand...


Just hiring someone doesnt mean they could be a private "contractor"


to qualify for this, they would have to advertise their services to the general public. This person did/does not do that so they could not be considered a private contractor...

In addition to this, that person would have to pay self employment tax, her share and the employer share of the FICA and Medicare tax, AND the FUTA tax. That would greatly increase the costs for them and then increase our costs.
 
rockcity said:
In addition to this, that person would have to pay self employment tax, her share and the employer share of the FICA and Medicare tax, AND the FUTA tax. That would greatly increase the costs for them and then increase our costs.
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yes, it would - but then 100% of your costs would be deductible. Those additional fees are, what, 10% extra? Even if your cost goes up 10%, having it all deductible leads to less total than being 10% less cost up front but only 5% deductible (as your mentioned) not to mention all of the other costs you mention. I'm also assuming that your deducted $$ is in a higher bracket than hers.
You could make a big theoretical equation that shows the balance point.

There has to be some way she can become self employed instead of being your employee. Even if she is an employee for a week, then changes status, it seems alot cheaper for you.

But this really is a question for a CPA, not a jackass like me that thinks he knows something :lol:
 
contractor or employee, the services are for child care and with 2 kids I can only deduct $6,000 of expenses from my AGI

That is crappy. I "employ" someone and cannot deduct their salary from my taxes like any normal business could. Then, I have to follow the same tax rules as a business and pay all the taxes, witholdings, etc. AND the employee also has to pay taxes on the earned $. Its a load of crap if you ask me but thats how the IRS works.
 
rockcity said:
That is crappy. I "employ" someone and cannot deduct their salary from my taxes like any normal business could. Then, I have to follow the same tax rules as a business and pay all the taxes, witholdings, etc. AND the employee also has to pay taxes on the earned $. Its a load of crap if you ask me but thats how the IRS works.
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I agree.
And IMO this is why people do thing "under the table". The IRS makes things so difficult, painful and nonsensical that the alternative of breaking the law becomes more attractive.
 
I was in a similar situation with a private child care provider. It seemed to me either we(employer)or the sitter(employee or contractor) ended up getting jacked, and the IRS rules added fuel to the fire of confusion. I like the last line of the OP, and in fact, thats what we did. We left the IRS and all the mess out and engaged in a mutually benenficial exchange of goods and services for cash.
If you want to make it official I would get an accountant at the least, possibly even an attorney with all the labor laws you would be dealing with.
Just my humble opinion
 
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