Families who hire nannies might be responsible for remitting payroll taxes, depending on how much the nanny is paid. On the bright side, some of these taxes can be offset through tax breaks.
There are a couple of ways you might qualify for tax breaks if you hire a nanny. One is if you have a dependent care flexible spending account (DCFSA), and the other is if you qualify for a Child and Dependent Care Tax Credit.
A DCFSA is used to pay for necessary child care or adult dependent care expenses — including nanny expenses — that allow you and your spouse (if married) to work, look for work or attend school full-time, according to the U.S. Office of Personnel Management. However, if you didn’t find a job and have no earned income for the year, your dependent care costs are not eligible.
Many employers offer the DCFSA through their benefits packages, according to Care.com HomePay. You can use an FSA to pay for up to $5,000 of nanny pay and other child care-related expenses using pre-tax dollars. Depending on your marginal tax rate, using an FSA might help you save about $2,000 in 2023.
The Child and Dependent Care Tax Credit helps pay for the care of eligible children and other dependents so you can go to work, look for work or attend school, according to the IRS. It is calculated based on your income and a percentage of expenses you incur for the care of qualifying persons.
To take the credit, you’ll need to file IRS Form 2441 on your federal income tax return. This form is where you itemize care-related expenses, such as nanny pay. Most families will receive a 20% tax credit on up to $3,000 of care-related expenses if you have one child, or $6,000 of care-related expenses if you have two or more children. This means your tax credit will be up to $600 for one child and $1,200 for two or more children.
Child care expenses can include your nanny’s wages, wages paid to a backup child care provider, taxes you incur on your nanny’s wages and money paid to a placement agency.
If you have one child, your best option is the DCFSA, according to Care.com HomePay. If you have two or more children, you might be able to take advantage of both tax breaks. For example, you can use your DCFSA for the full $5,000. If you have leftover child care expenses, you can apply another $1,000 toward the Child or Dependent Care Tax Credit.
Just make sure all of the wages you pay to your nanny are over instead of under the table.
“The most important thing to remember is that you can’t qualify for a tax break on your child care expenses if you aren’t paying your nanny legally,” Tom Breedlove, senior director of Care.com HomePay, said in a statement.
Another thing to keep in mind is that you might be responsible for payroll taxes on your nanny’s wages if those wages exceed the nanny tax threshold. For 2023, the threshold is $2,600, according to GTM Payroll & HR. That’s up from $2,400 in 2022.
When you reach that limit, employer and employee shares of Social Security and Medicare taxes must be remitted. If a nanny is paid $1,000 or more in a calendar quarter, then you’ll need to file and pay federal unemployment taxes. State unemployment taxes might also apply, depending on where you live.
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