By Carolyn Bigda
Paying the wages of a nanny or baby sitter is expensive on its own. But if you’re hiring a nanny for the first time, be sure not to forget another important expense: taxes.
In the eyes of Uncle Sam, you may owe taxes on wages you pay your caregiver or any other household employee whose hours and responsibilities you control.
Still, the “nanny tax,” as it’s known, often goes unpaid.
“More people are liable for these taxes than they think,” said Laura Weiland, president of The Nanny Tax Co., which helps prepare household employee tax forms.
The IRS can’t audit every potential household employer, but there are ways to get caught. A former nanny, for example, may try to collect unemployment benefits after being let go from the post.
When there’s no record of the job, a red flag could go up, and you could be on the hook for past taxes, plus interest and penalties.
So to get off on the right tax foot when hiring someone to care for your child at home, follow these tips:
First, figure out the taxes you must pay.
For 2014, wages that total $1,900 or more for a household employee are subject to Social Security and Medicare taxes (known as Federal Insurance Contributions Act, or FICA, taxes). The tax is 15.3 percent of pay, half of which you can withhold from your employee’s paycheck.
The other half, 7.65 percent, is your responsibility as the employer.
If you pay $1,000 or more to household employees during a calendar quarter (say, October through December) you also owe the federal unemployment tax, which is 6 percent of the first $7,000 of pay. You’ll also be on the hook for any state unemployment taxes.
HOW TO PAY
Keep in mind that you cannot classify household employees as independent contractors, who receive a Form 1099-MISC and pay the full 15.3 percent of Social Security and Medicare taxes themselves. By law, all household employees must receive a Form W-2.