Two strategies offset 'nanny taxes'
Here are two strategies to offset “nanny taxes,” which are those paid on people working in your home.
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.
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