Having help around the house can definitely make life easier for parents. But, it’s important that parents understand the tax responsibilities for hiring and paying a babysitter. Many parents are unaware that these earnings must be reported and often find themselves victim of the “nanny tax”. Just a reminder: Any money earned or paid must be reported the IRS. It doesn’t matter if it’s cash, gift certificates or other earnings.
However, these taxes are a bit intimidating to regular parents. In order to make things easier, we’ll focus on the three basic tax areas for babysitters and parents. These areas are influenced by the type of work done, relationship to the working person and amount of money paid.
- Influence On Work – First parents must determine whether the person doing the work is an employee or independent contractor. For unsure parents, follow the scenarios below:
- Individuals which are paid for various household services – think repair person – are typically considered independent contractors. Independent contractors choose their own hours, set their own pay and choose when and how to work.
- Individuals which are controlled by the household or employer are considered an employee. This means that anyone with set hours, set duties and a set pay rate are most often considered an employee.
If a parent determines that their babysitter is considered an employee, it is up to the parents to report earnings. In addition, the babysitter must fill out an I-9 form to verify their eligibility for employment in the United States. Parents must also collect copies of legal documents for verification, including a state ID and Social Security card.
- Relationship – Parents are not required to withhold taxes if the person doing the work is a spouse, child under 21 or parent.
- Amount Paid – Parents are required to withhold Medicare and Social Security taxes on any employee that has earned over $1,800 in the given year.
- Parents are not required to withhold federal or state taxes, but may do so with the proper forms.
- Parents are required to pay into federal unemployment taxes if the employee has earned over $1,000 in one quarter.
- It’s also good to note that many states do have their own unemployment tax laws. So parents must look them up and stay up-to-date on all state tax laws.
Many parents determine that a household payroll is the easiest way to abide tax laws, but this income must be paid on their tax return. If a parent has a payroll they must file a Schedule H form, which calculates the federal taxes on those specific wages. Parents must also file a W-2 form with the IRS for each employee. Note: Parents must give a copy of the employees W-2 file to each employee.
Whether a parent hires a babysitter for full-time work or seasonal work, these tax laws apply for each employee and independent contractor. Depending on tax law knowledge or number of employees, it may be best to consult with a professional tax consultant. The California Babysitters website has ongoing advice for Parents from Los Angeles to San Jose to San Diego.