Wrapping Up Your Summer Nanny Tax Responsibilities

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The summer season is a popular time for families to hire a nanny. The kids are out of school, but mom and dad still have to work. When the summer is over, most families go back to their normal routine and don’t think about the eight to 12 weeks of caregiving they paid for.

But before you shut the book on the summer season, there are three tax-related housekeeping items you need to be aware of.

1. The amount of money you paid your nanny is important. Did you know the IRS considers a nanny to be your employee? It’s true. There’s a whole section of the tax code dedicated to “household employment,” and nannies fall under that category. If you paid your nanny $2,000 or more throughout the summer, the IRS says you must withhold Social Security and Medicare (FICA) taxes from her and pay an equal amount of FICA taxes yourself. But don’t worry, when you do things by the book, the IRS will reward you.

Note: If you paid $1,000 or more to your nanny from April 1 through June 30 or July 1 through Sept. 30, you will owe federal and state unemployment insurance taxes as well. More information on household employment taxes can be found here.

2. Don’t forget about your tax breaks. If you follow all the tax rules for your summer nanny, the IRS rewards you with tax breaks. The most fruitful one is a dependent care account, a type of flexible spending account (FSA) offered through your employer.

You would have needed to enroll in this benefit months ago, but it allows you to set aside up to $5,000 to pay for qualifying expenses. Obviously, hiring a nanny would be a qualifying expense. The reason this saves you money is because the amount you put into the FSA isn’t taxable. Your savings is based on your marginal tax rate, but generally speaking, you can expect to save around $400 for every $1,000 you put aside.

If you don’t have an FSA or never enrolled in one, you can use the Childcare Tax Credit instead. You’ll use IRS Form 2441, Child and Dependent Care Expenses, and attach it to your personal income tax return. You can claim up to $3,000 in childcare expenses if you have one child, or up to $6,000 if you have two or more children. Most families get a 20 percent tax break on these expenses, so you’ll save as much as $600 if you have one kiddo and $1,200 if you have two or more.

As you can see, the savings are pretty good. Almost all families that hire nannies for the summer and have tax responsibilities will offset their tax costs by taking advantage of the tax breaks. And many save even more than they paid in taxes, which means they chip away at their overall cost of hiring the nanny in the first place!

3. Make sure you have your nanny’s Social Security number and/or address before the summer is up. This seems like an odd thing to have on file for someone who only worked a few weeks, but you’ll need it for your taxes. If you paid your nanny $2,000 or more during the summer, you’ll need to send her a W-2 so she can use it to file her taxes. You’ll need her address, too, so you know where to mail it to. If you’re planning on using the Childcare Tax Credit, the form requires you to enter your nanny’s Social Security number.

It’s important you explain this to your nanny because most will be very apprehensive to give it to you – especially if you didn’t have to withhold taxes from them.

It feels strange to think about taxes during the summer, but hiring a summer nanny comes with a unique set of rules. It’s crucial to make sure all loose ends are tied up before moving along with the rest of your year so tax time doesn’t end up being more complicated than it has to be.

About Tom Breedlove

Tom Breedlove

Tom Breedlove is the director of Care.com HomePay, which specializes in payroll, tax, and labor law services for families with household employees.

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