- Get an Employer identification number (EIN), which is a nine-digit number issued by the IRS, and you must include your EIN on the forms you file for your household employee. EIN is a unique number associated with your business for tax purposes. (gov). You will need a new EIN for any changes in your business, not necessarily if you hire a different nanny.
- Get a State Employer identification number at your state’s website. Same as above, different unique number. State tax systems are separate from federal government, so you will need to register your business twice-once for federal and once for state government. You can look up your state here: State Revenue Site from the IRS.
- Your life will be much easier if you find someone who can legally work in the United States. Form I9 will determine if an employee is legal and will need to be kept for your records should you ever have an audit.
- Assuming you want to withhold taxes instead of paying a lump sum to the government in April, ask them to fill out a W-4 and keep for your records.
- If they are not single or have more than zero allowances, they should fill out a state withholding form too. We agreed to do the standard deduction for my nanny and will not have to fill out.
- Tell your state you hired a new person. See your states new hire website. For Texas that is through the Texas Workforce Commission.
Paying the Household Employee - Do's and Don'ts
You will need a way to track and calculate payroll. Each pay period, you need to generate a pay stub and print or email.
Do not withhold calculations from employees, as they are entitled to view the details of their paycheck. You should itemize hourly and overtime rates as well as number of hours being paid that period, and deductions that are being withheld. Google "nanny pay stub" for free templates to use and plug into a spreadsheet. Next, you calculate gross pay with hours*rate +extras such as gas mileage, bonus, or any other wages like paid vacation or health insurance.
Do not ignore overtime. Overtime must be paid at least 1.5 times that of the regular pay rate. The exception to this is if your employee lives with you, such as a live-in nanny. Trying to get around this rule by offering a salary instead of an hourly wage is illegal, and you may face repercussions long after you terminate an employee. Employees can come to you and file a wage dispute, which means you’ll be paying back wages, back taxes, penalties, and interest (CPA).
Never pay “off the books,” as it can lead to tax fraud charges. If your taxes go unpaid, you may face felony charges that will affect you for the rest of your life. Be honest, and keep detailed records, and you shouldn’t have to face any fines or criminal charges in the future. There is a lot of ways to issue payment (PayPal, cash app, checks), direct deposit was out because of separate banks between us and nanny, so now use Zelle.
Social Security and Medicare Taxes (Federal Insurance Contributions Act – FICA) and Federal Income Taxes
Big, scary words! Simple though, if you break it down into three steps.
- Social Security is 6.2% of the gross pay, and Medicare is 1.45%. You withhold this and will match it and pay it to the government once a quarter or year.
- Federal income tax, the standard deduction for 2022, is $12,950. This is $12,950 of untaxed income: If you pay bimonthly (24 pay periods), subtract $539.58 from gross income to calculate federal income tax. Here is the tax brackets page. Our nanny falls in the 12% bracket, and as we pay her bimonthly, her federal income tax is (gross wage - $539.58) x 0.12 per pay period.
- State income tax can have different standard deductions from the federal rate. Here is another helpful resource about deciding if you need to pay state income tax.
Summary: Pay your nanny (hours x rate) + other taxable money, subtract Social Security and Medicare (step 1), federal income tax (step 2), and state income tax (step 3 if required).
Tax Time = More Paperwork!
To create a W-2 form (must be by January 31) you can pay money to someone online or use the government website at Business Services Online. After you register you will have to fax the EIN form in. Then they call you once it is received and tell you that you can use the services. Plug numbers in, it will generate a W-2 to give to your nanny. The government site magically, well automatically, makes and sends a W-3. File electronically!
How to Pay the Government
- To pay your taxes in April, you need to fill out a Schedule H and file it with your taxes. Schedule H is straightforward calculations using gross wages, and it calculates how much you owe for social security/Medicare. Withheld federal income and Federal Unemployment Tax (FUTA - see step 2) are reported on same form. The nannie’s federal income tax, social security Medicare, and FUTA is paid with your income tax and 1040 in April. It is recommended to pay quarterly to avoid lump sum.
- To pay quarterly, go to the online payment website by the 15th of January, April, June, and September and file he 1040-ES. This is where you will pay the FUTA, federal income tax, social security, and Medicare each quarter using your EIN.
- You will pay FUTA. To find out whether you will owe state unemployment tax, contact your state's unemployment tax agency. Don't withhold the FUTA tax from your employee's wages. You must pay it from your own funds. In Texas, and everywhere except California or the Virgin Islands, it is 0.6% of wages up to $7000 per year. $42 per employee per year to Electronic Federal Tax Payment System.
- You will also be responsible for State Unemployment Taxes (SUTA) if applicable.
- To pay your state income taxes that you withheld earlier, go to the state's Department of Revenue site and send it there.
Easy enough, right? I will not disclose how much time I spent writing this and was heavily discouraged at first. I hope this will be helpful whichever route you choose, and if anything, help you understand where your money is and where it is going. I hope you can appreciate the "business expenses" of having a nanny, and not forget a good one is worth every penny. Do not forget to treat them fairly and be a great boss!
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.