Q&A with Jeffrey C. Rambach
Nanny taxes can be minimized
Q: What are “nanny taxes?”
A: If you pay someone working in your home $1,800 or more per year, the government considers you an employer responsible for paying nanny taxes. If you pay someone $1,000 or more per calendar quarter, you must pay nanny taxes and file them quarterly.
There are two components of nanny taxes: the employer contribution includes Social Security, Medicare, federal unemployment taxes and state unemployment taxes. The employee withholding includes Social Security and Medicare and possibly, federal and state income taxes.
Generally, a single employee with no children will take home about 80 percent of her gross earnings. The employer's contribution costs about 10 percent of the employee's salary, but there are strategies to help you offset the nanny taxes you pay.
Q: How can I offset the nanny taxes I pay?
A: There are two strategies: flexible spending accounts and dependent care tax credits. With flex, you may completely offset your nanny tax costs. For example, paying your employee $500 a week will lead to nanny taxes of about $1,900 annually. By contributing $5,000 pretax dollars into your flex account, you may reduce your annual taxes by about $2,000. By doing so, it may not cost any additional money to pay nanny taxes.
The dependent care tax credit is a credit toward taxes you owe that is based on the number of children you have under age 13. The credit can reduce your federal taxes by $600 for one child or $1,200 for two or more children. For example, if you owe $1,300 in income taxes, this benefit will reduce your taxes owed to $100 if you have two children or $700 if you have one child.
Q: When do I pay my nanny taxes?
A: Federal nanny taxes (Social Security, Medicare, income taxes and federal unemployment) are generally paid with your federal income taxes. State nanny taxes (unemployment and income taxes) are generally paid quarterly. You must provide your employee a Form W-2 by Jan. 31 and file Forms W-2 and W-3 with the Social Security Administration by Feb. 28.
Q: Am I required to withhold federal and state income taxes?
A: You are not required to withhold these taxes unless your employee asks you to and you agree. If you don't withhold, your employee must pay these taxes on her own and may need to make quarterly estimated tax payments.
Q: Can I hire an undocumented worker?
A: No. When you hire a household employee, you and the employee must each complete part of the Immigration and Naturalization Service Form I-9, Employment Eligibility Verification. You must verify the employee is a U.S. citizen or an alien who can legally work in the U.S.
Q: Where do I get information about preparing nanny taxes myself?
A: Consult IRS Publications 926 and 15, known as Circular E. Contact the Oklahoma Tax Commission and Oklahoma Employment Security Commission for information about the state income tax laws and forms to complete.
PAULA BURKES, BUSINESS WRITER