The mere mention of the words “Nanny Taxes” can be stressful and confusing for parents. Many parents pay their nanny under the table, largely to avoid the hassle of paperwork. But nanny taxes don’t have to be an overwhelming prospect. And most importantly, not paying your nanny taxes is illegal. Take a deep breath. Think of paying nanny taxes as a good thing. There is peace of mind knowing you are following the letter of the law and are in good graces with the IRS.
Get expert answers to all your nanny tax questions.There are several companies who can help you navigate nanny taxes. Cambridge Nanny Group recommends Breedlove & Associates. You may contact them by clicking the icon below or calling 1-888-Breedlove. You will receive instant answers and advice to all your payroll and tax questions.
Your Nanny Tax provider will take care of all the paperwork and compliance but here are just some of the benefits:
AVAILABLE TAX BREAKS A tax break is available to you – regardless of your income level – if you have childcare related expenses from the employment of a nanny, tutor, personal attendant, or housekeeper whose services are at least partly for the well-being and protection of your dependent (under age 13). To qualify for a tax break, your household must meet the work related test which means that the care is needed because both spouses work, are looking for work, or are full-time students.
If you pass the work related test, there are two tax breaks available:
Dependent Care Account. Also called a “Flexible Spending Account” (FSA). If you work for a participating company, you can pay for part of the childcarerelated expenses using pretax dollars. The limit is $5,000 per family per year. Depending on your marginal tax rate, your FSA can put as much as $2,300 per year in your pocket. For enrollment details, check with your HR or Accounting Department.
Child or Dependent Care Tax Credit. Families may itemize care related expenses on their federal income tax return using IRS Form 2441. The expense limit is $3,000 forone dependent or $6,000 for 2 or more dependents. The 20% credit will yield an annual savings of $600 for families with one child and $1,200 for families with 2 or more children.
Maximizing Your Tax Breaks
IF YOU HAVE ONE DEPENDENT, your best option is the FSA. Utilize the full $5,000 (if your expenses will be $5000 or more). You’ll save between $2,000 and $2,300 per year, depending on your marginal tax rate and which state you live in. If you don’t have access to a FSA (or cannot enroll until a future tax year), utilize the Tax Credit. You are not eligible to use both tax breaks.
IF YOU HAVE TWO OR MORE DEPENDENTS, utilize your FSA for the full $5,000 (if your expenses will be $5,000 or more). This will save you between $2,000 and $2,300 per year, depending on your marginal tax rate and which state you live in. If your dependent care expenses are greater than your FSA contribution, you have “excess expenses”. The excess expenses can be applied to the Tax Credit on Form 2441, which will save you an additional $200 per year. For a typical family with 2 or more dependents, combining the FSA and the Child Care Tax Credit will result in a total savings of $2,200 to $2,500 per year.
- Wages paid to a caregiver;
- Employer taxes on wages paid to a caregiver;
- Fees paid to a staffing agency in order to find a caregiver;
- Fees paid to a daycare center or daycamp (overnight camps do not qualify).
Are there any other ways to save money?
If a family pays for at least 50% of their employee’s health insurance premiums, they are entitled to the Health Insurance Tax Credit for Small Employers. It provides a tax credit of up to 35% of the total annual employer health insurance contribution.
In addition to this tax credit, please note that employer contributions to health insurance premiums are considered “non-taxable compensation,” meaning neither employer nor employee is required to pay taxes on that portion of the compensation.
There are three other forms of employer contributions that are “non-taxable” as well:
If you have additional questions about this or any other aspect of household employment tax, please call 888-BREEDLOVE (888-273-3356).