US Employment Tax Information for Nannies - The Nanny Taxes
Courtesy of Home/Work Solutions, Inc.
The "Nanny Tax Experts"
US Nannies should try to be more aware of their legal rights and tax obligations than the average new employee of a business. Why? Because compared to the business employer, their family-employers will usually know far less about employer and employee obligations under the US Tax Code. And if your employers are foreign, perhaps working for an international company, then they will be even less familiar with how employment works in the US.
When you accept a job as a nanny, whether you found the job though a placement agency, an internet nanny service, or on your own, you are entitled to:
- A contract from your employer spelling out the terms and conditions of your employment
- An annual Wage and Tax statement, Form W-2.
You should remember, however, that being an employer might well be a new experience for the family you are working for. If you are well informed, you could even help your employers to understand and fulfill their legal obligations to both you and the Internal Revenue Service.
Employee or Independent Contractor?
With few exceptions (these being some doulas and some nannies in continuous temporary employment), if you work as a nanny you are an employee. It is your employer's [the family] responsibility to register with the Internal Revenue Service as an employer. They are responsible to deduct Social Security and Medicare tax contributions, on your behalf, from your gross wage, and pay these to the Internal Revenue Service, along with an additional employer's Social Security/Medicare contribution (which is part of their total cost but not part of your gross wage). Your employer is also required by law to provide you with an annual Wage and Tax Statement (Form W-2) by January 31 following the close of the year. The Form W-2 is a summary of your annual income and total tax deductions made by that employer. (Note: if you had multiple employers, you should receive a Form W-2 from each of them.)
If your employers tell you to take care of your own tax or ask you to be self-employed, you should refuse and insist that it is their responsibility. You can refer them to IRS Publication 926 for details. Nannies simply do not meet the Internal Revenue Service's criteria for self-employment. Having two or even three part-time jobs does not make any difference in this respect. Failure to insist on the employee-employer relationship will jeopardize your coverage under Worker's Compensation, Disability Insurance, and Unemployment Insurance programs. Nannies are in great demand - you should insist on a legal tax relationship or find another family that will meet their obligations!
Get It In Writing
Once your wages and conditions of work have been established and agreed to, make sure you receive a contract, or at the very least a letter of agreement, before you start work. This should clearly spell out (among other things) your agreed salary (specifying whether net or gross) and your employers' acceptance of their responsibility to withhold and remit Social Security and Medicare tax to the Internal Revenue Service on your behalf. It should also specify whether the family will be deducting your income taxes (Federal and State) or whether you will be responsible to pay these amounts directly to the appropriate taxing authority. Your employer, with few exceptions, is not liable for any of your personal income taxes. If an employer fails to meet their responsibilities, having your own copy of their agreement to do so, in writing, is your greatest protection. Most nanny agencies have a standard family/nanny work agreement that deals with hours, salary, and duties. There are also many variations available on the Internet.
DOWNLOAD WORK AGREEMENT FOR LIVE IN NANNY (PDF)
DOWNLOAD WORK AGREEMENT FOR LIVE OUT NANNY (PDF)
CLICK HERE FOR MORE EMPLOYMENT FORMS
Net Pay or Gross?
You may have been quoted a net wage (i.e. the amount you will actually receive in your hand at the end of the pay period) by your nanny agency or employer. However, whether you have been quoted net or gross, it is important to understand that in reality you are always being paid a gross wage. It is advantageous to both you and your employer to agree to a gross wage (or at least to establish in your contract that your salary consists of a net wage plus employee Social Security and Medicare tax contributions and possibly income tax contributions). MANY MANY times you, the nanny, think the net payment you receive every week is after all of your tax obligations, including income taxes, while the family believes, rightly so, that they are only legally responsible for the Social Security/Medicare taxes. It is an unpleasant experience when you receive your W-2 in January to find that no income taxes have been paid in. A single nanny being paid net $400 per week would owe, at the end of the year, $1500 - $2500 in income taxes! Another important advantage of agreeing to a gross wage is that if tax rates are cut, as they have been several times in recent years, you automatically get the benefit, rather than getting the benefit (or not) at your employer's discretion.
What Happens if Your Employer Doesn't Pay the Taxes?
If you are not sure whether your employer is paying your Social Security and Medicare taxes, make some inquiries. Ask your employer for their Federal Employer Identification Number [FEIN] and a written statement of your quarterly earnings. The employer needs to report quarterly earnings to taxing authorities anyway, so this information should be readily available. Employers using a nanny tax service, HomeWork Solutions for example, can obtain quarterly earnings reports from the nanny tax service. If they don't have an FEIN they can't be paying your tax!
If you've just recently started working for them and they haven't employed before they may be in the process of setting up employer accounts. This will take 2-4 weeks, a little longer if the employers are not US citizens. Meanwhile, they will remain responsible for reporting all wages, even those paid before accounts were established, and remitting all taxes.
If you leave a job during the year, particularly if it was not on good terms, you should request, in writing, a wage and tax statement from the family. The family is legally obligated to provide separated employees with W-2 summary information, including the family's FEIN, within 30 days of a request. Bear in mind that the official form W-2 is often not available until late fall, so a written statement with all of the appropriate information will suffice. Make sure the family has your forwarding address so they can deliver the official W-2 statement in January.
Where to go for help?
There are many resources available to help the nanny understand her tax obligations. A good place to start is by calling the IRS forms office at 1-800-TAX FORM or visiting irs.gov and request a copy of Publication 926. On the web, information can be found at www.4nannytaxes.com. If you worked with an agency, ask your agency representative for assistance, particularly if it involves the work agreement. Most importantly, communicate your concerns and questions with your employer. If you like your job and your employer is happy with your performance, open communication about pay matters can prevent a misunderstanding from turning into a major issue.
Information provided as a courtesy by Home/Work Solutions, Inc., The "Nanny Tax Experts." To request a free information about the "Nanny Taxes", call 1-800-NANITAX.