How to Set Up a Nanny Payroll

Families become employers when they hire a nanny, subject to the same payroll taxes that large corporations deal with. This step by step guide will help families establish the payroll process for nanny tax compliance.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Employer Social Security Number
• Nanny Social Security Number or ITIN

1. Put the compensation details in writing. Your nanny is your employee and it is important to document the financial agreement to protect BOTH of you. You should document a base weekly pay based on specified days/hours of employment and put the wage in HOURLY wage terms for FLSA (Fair Labor Standards Act) compliance.
2. State payroll frequency. Will the nanny be paid weekly, bi-weekly or semi-monthly? What day is pay day? Be careful - as non-exempt employees, many states have established stringent minimum payroll frequency regulations.
3. Detail payroll deductions (if any). You are entitled to deduct the employee portions of Social Security and Medicare taxes from the nanny's payroll. You ARE obligated to make remittance (pay) BOTH the employee and the employer contributions to Social Security and Medicare whether you deduct it or not. Deducting your employee's income taxes is optional. Most employers of full time household staff offer to do this for the employee. There are nanny tax calculators online to help you calculate this free of charge.
4. Require that the nanny keep a time card. The FLSA requires employers to maintain accurate and complete contemporaneous time tracking records for all hours worked by an employee. This does not have to be complicated. Many families require that the nanny keep a daily Nanny Log and simply use this to track time and expenses too.
5. Obtain completed Forms W-4 and I-9 from your employee. These forms are legally required and should be kept with your permanent employment records. The W-4 will provide you the nanny's particulars for tax filing, including legal name, address and Social Security Number.
6. Immediately obtain a Federal Employer Identification Number from the IRS. This number is required for all Federal tax reporting, and most state tax agencies require this number as part of your state registration process.
7. Research and apply for a state unemployment tax account, and state withholding tax account if you are deducting the nanny's state income taxes. Timely registration and filing with your state will avoid late filing penalties and will qualify you for the most favorable unemployment tax rate.
8. Comply with Federally-mandated state new hire reporting. Federal legislation mandates that all states implement and manage New Hire Registration Programs to track individual employment data for purposes of expedited child support enforcement and fraud control of various welfare programs.
9. Research Workers Compensation Insurance requirements. Requirements will vary by state - a licensed insurance broker or your state's insurance commission are good resources. Penalties for not securing a policy promptly, if required, will cost you hundreds, if not thousands, of dollars.
10. Familiarize yourself with tax reporting schedules and requirements. While some tax reporting is done on an annualized basis, most state reporting is done quarterly. Occasionally, some employers are required to make some state reports and payments on a monthly basis. Many families choose to outsource much of the tax related paperwork to Nanny Tax services. This allows you to focus on your family, your nanny relationship, and your career with the confidence that trained professionals are supporting your payroll tax obligations.

Tips & Warnings

• Nannies are NOT independent contractors - read IRS Publication 926 for confirmation.
• Families who do not pay the nanny taxes often get caught when the nanny files for unemployment insurance after her job ends.