Many household employees, including nannies, expect to negotiate a “net wage” or “net take home pay” agreement with their employer. The net take home pay agreement is a foreign concept for many nanny employers, and often the new employer does not fully understand the financial implications of a net pay agreement with the nanny or housekeeper.
HomeWork Solutions always advises hiring families and nannies alike to put together a written work agreement. This is the place to document your financial agreement with your household employee, including the respective tax obligations of the family and nanny, as well as to articulate benefits, job responsibilities, and the all important confidentiality agreement. Most importantly, state the agreed GROSS hourly wage or before tax wage in this agreement so both parties are in agreement up front. This is vitally important when a family agrees to hire a nanny on a net wage or net take home pay basis, as these terms are subject to interpretation and the two parties may have different understandings of what this means.
As a household employer, the family has certain tax obligations that they are legally required to comply with, and some they may choose to handle as an accommodation to their employee. Thus, a net wage agreement will always involve the Social Security and Medicare taxes, and may include the employee’s income taxes. Families may either agree to a take home pay net of the Social Security and Medicare taxes (and stipulate that the employee is responsible for his/her income taxes) OR may agree to a take home pay net of both the Social Security/Medicare taxes AND the employee’s Federal and State income taxes. All too often the family intends the former, and the employee assumes the latter. When this is not clearly understood, considerable strain can be placed on the relationship at tax time!
The employer is solely responsible for the remittance of all Social Security and Medicare taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer. A net wage agreement ALWAYS involves an agreement that the employer will be paying both the employee and employer portions of the Social Security/Medicare taxes. The employee’s portion of the Social Security/Medicare taxes is 7.65% of gross wages.
As a household employer, however, you have no legal obligation to withhold (or remit) the employee’s income taxes. Most families with a full time employee (nanny or housekeeper for example) will agree to withhold the employee’s income taxes as an accommodation to the employee. After all, this is what all other employers do (whether they want to or not) in the commercial world. In a net take home pay agreement where the employer agrees that they will “gross up” the employee’s wage for tax reporting purposes to include the employee’s income taxes, this should be clearly understood by all parties.
The illustration below assumes a single nanny, no dependents living and working in Montgomery County MD who is paid net $600/week for a 40 hour work week. Numbers are rounded for illustration purposes.
Net of SS/Medicare Only Net of SS/Medicare & Income Taxes
| Net Take Home Pay | $600.00 | $600.00 |
| SS/Medicare 7.65% | $45.90 | $62.38 |
| Federal Income Tax | N/A | $96.26 |
| State Income Tax | N/A | $56.88 |
| Gross Wage | $645.90 | $815.52 |
| Est. Employer Taxes | $64.00 | $81.00 |
| Employer Cost/Wk. | ~$710.00 | ~$896.00 |
| Employee Rate/Hour | $16.15 | $20.39 |
The table above clearly illustrates the tremendous difference the two net wage scenarios have on the financial commitment of the family. Another important consideration is that any amounts the employer reports and pays for the employee’s income taxes are HER money. If she ends up getting a tax refund at the end of the year, this is HER tax refund. We recommend that you discuss the employee’s filing status in detail with our firm (800.626.4829) or with a qualified tax practitioner. While no one can guarantee that the nanny will not either owe some money or receive a refund upon filing an annual tax return, there are reasonable steps to take that can get this calculation as close to break even as possible. Again, the statement in the work agreement on the agreed GROSS compensation is vital to all parties.
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