Legal Nanny Payroll – How to Pay a Nanny Legally

In the “nanny world”, the temptation to accept a job that pays CASH (off the books, no payroll or income tax reporting) is faced by every nanny. After all, who LIKES to pay taxes? Professional nannies know, however, that being paid legally is ultimately in their own best interest. Why? Read on to find out how to pay a nanny legally and all the reasons why it pays to do so.

Unemployment Benefits

Nanny jobs are, by their nature, not permanent positions. The children will grow and move on to school. The family’s child care needs change dramatically from full time, to part time, to after school or before school only. The full time nanny typically will have to move on every few years. The experienced, professional nanny knows that short term unemployment benefits are a life saver to bridge the time, planned or unplanned, between jobs.

While it is true that you can apply for and receive unemployment benefits even if you were paid cash only, your benefits will be delayed and you will eventually be faced with penalties for failure to file and pay your own income taxes.

Access to Medical Insurance under the Affordable Care Act

Employees (those with legal payroll) whose employers do not offer group plans – this is the majority of nanny employment – may obtain legally mandated individual health insurance through the online marketplaces. Low and middle-income employees qualify for ACA tax credits that will ensure that good coverage is also affordable coverage. Your employer may also offer to reimburse some or all of your individual insurance premium tax free using an Health Reimbursement Arrangement (HRA).

Verifiable Income

Whether you want to buy a home, rent an apartment, purchase a car, or just qualify for a cell phone plan, at some time or other, you will need to have verifiable income. Verifiable income means you can prove that you have a record of consistent income sufficient to meet your proposed financial obligations – either pay check stubs, direct deposit advices, bank statements witnessing the deposit of regular pay, and/or tax returns.

Workers’ Compensation Coverage

Any nanny can suffer an on the job injury that will require medical care (and cost), and that can keep her out of work either temporarily or permanently. Your employer may only obtain workers’ compensation insurance – insurance that would cover these medical bills and lost wages – if your income is on the books. If you are not being paid legally, your only option if you suffer an injury is to sue your employers – a costly and time consuming proposition.

Social Security & Medicare Benefits

Eventually you will retire and need retirement income. If you did not pay into the system you will not qualify for future benefits.

Tax Credits

Low and middle-income employees can have access to refundable tax credits and these sometimes exceed your total income taxes! Additionally, more than 20 states, the District of Columbia, and various City/County governments have offered tax credits to low income wage earners.

It’s the law!

Tax evasion is a crime. You will sleep better knowing this is being taken care of.

Frequently Asked Questions

I am starting a job as a nanny (housekeeper or other domestic). What taxes do I have to pay?

Congratulations! If you will be paid $2,700 (2024) or more in a calendar year, your payroll tax obligations may include Social Security and Medicare taxes, as well as state and Federal income taxes. You can use HomeWork Solutions’ free payroll tax calculator to learn how much you will take home after these tax deductions. This is important information to have, so you can negotiate for the right gross wage!

Can’t I just be an independent contractor and pay my own taxes?

The simple answer is no. And, you don’t want to pay taxes this way either! The IRS is very clear that nannies are employees, NOT independent contractors, and that the family you work for, the household employer, is ultimately responsible for the reporting and remittance of household employment taxes. When you file as an ‘independent contractor’ you pay 7.65% more tax – tax that should properly be paid by the family – and lose the protections of workers’ compensation insurance. Additionally, if you ever need to file for unemployment insurance your claim can be delayed by many weeks as the benefits administrators investigate your employment history – and trigger unpleasant back tax obligations for your former employer.

This sounds expensive! I hate paying taxes!

We have good news for you – being paid legally may qualify you for tax savings!  In addition to refundable tax credits made available to low income wage earners, you may also qualify for subsidies for your health insurance. These can total more than any tax you might have owed. You can only claim these tax benefits when you are paid on the books!

Ok, what do I have to do in order to pay a nanny legally?

Your employer will ask you to fill out two documents when you start working. The IRS Form W-4 will collect your legal name, address, SSN and information on how you want your income taxes deducted. Your employer may agree to deduct (withhold) your income taxes, or s/he may ask you to pay these directly. You can use HomeWork Solutions’ free payroll tax calculator to figure out how much income tax you will owe – or if you want help, call us toll free at 800.626.4829. The DHS I-9 form will verify your legal eligibility to work in the United States.

Are there other rules and regulations I need to know about?

The expanded FAQs at the HomeWorkSolutions.com website will walk you through many important issues. Most benefits and conditions of employment are negotiated between you and your employer – insist on a written Work Agreement to write down the details. Your referral agency can help.