Hiring a shared nanny as a household employee

Factual Questions
1

I was wondering if anyone has any info about what the laws are about hiring a nanny. I have done a little research online, and one site claims that by law, nannies must be considered household employees and not independent contractors. Is this true in all states, even if the nanny is not a live-in?

My situation is that a friend and I are looking to share a nanny. She needs childcare every day for one child, I need childcare 2 days a week for 2 children. We are considering hiring someone to be at her house every day while I send my kids over there 2 days a week. Do we both need to claim her as household employees, or just my friend? How can I legally pay her my share of her income? Can I use my pre-tax flex account if she is my friend’s employee?

Any tax advice would be appreciated. Should my friend and I hire a CPA or can we set this up ourselves? I know if she is an employee, we would have to withold taxes for her and pay quarterly estimates. How difficult is this? Also, does anyone who has hired a nanny before know if my friend would need different insurance on her house to have an employee or other people’s kids there?

It seems like this is going to be really complicated, I would rather have the nanny set up as her own business and let her pay her own taxes, but of course we want to be legal and fair for everyone.

2

Well just a quick thought, many temp agencies will happily do all the heavy lifting tax and bennies wise for about a 25% markup/premium. So you will probably end up paying more but it puts all of the legal issues on the temp agency.

As far as you sharing the nanny, as long as you are not out of compliance WRT # of children supervised by day care providers in your area you can probably do whatever the nanny agrees to. S/he could be hired/contracted based on the extra kids a couple days a week, prolly little skin off his/her nose either way.

Nanny should probably only be the employee of one of you, the other could pay the “hiring” person for abysitting services just like any business.

3

You can certainly do it on your own - we have had a nanny for years and I do all our paperwork, filing etc. on my own. Fortunately, after you’ve got everything set up, it’s not all that arduous.

From a contractor vs employee standpoint, the nanny would (by any definition I’ve read) be considered an employee.

You have to have a federal employer ID number, and a state employer ID number, and a state unemployment ID also; well, depending on your state that may vary of course. We’re in Virginia so I speak from that standpoint.

I file two quarterly “returns” for the nanny: one is her state income tax withholding (my nanny has opted to not have state tax withheld; this is legal in VA as long as it’s all reported; she sorts it out when she files her annual return). Basically I go to the state revenue department web page, log in, put ‘zero withheld’, and I’m done. The other is the quarterly unemployment. That I do have to do a little more arithmetic - only the first 8,000 is subject to unemployment tax so I have to figure out each quarter whether that’s been exceeded, and by how much. And I have to pay a few dollars in unemploymenttax each quarter (it’s never been more than 30-40 for the year). Again, this takes a couple of minutes on the state’s web page.

At the end of the year I file an end-of-year state tax return, I also have to file W-2/W-3 stuff with the Social Security Administration. That takes a little longer… though not much since I found the SSA has a web page that does the job - I plug in my numbers, they create a PDF, and I print a few copies. I give one set to the nanny, another set to the SSA, another set to the state.

And when I do our annual taxes, I have to fill out a Schedule H (think that’s it - Household Employees). I say how much I paid her. It has me calculate the social security/FICA and I remit that, plus any federal tax I’ve withheld. BUT - basically it adds to my bottom line tax bill. If my normal taxes for the year were 10,000, and the FICA/fed tax for the sitter was another 1,000, then my tax bill is 11,000 - and I need to have that covered via withholding or quarterly estimated taxes. I handle that by an increase in the amount my employer withholds - rather do that than forget to file my quarterly.

Anyway - it sounds like a lot, but after the first year, it’s fairly easy. Quicken and Excel help a lot.

In the situation you describe… I guess one approach would be to have one family do all the tax paperwork, and you just compensate them for their portion of the FICA. That might be tricky if you both have flex spending accounts, or want to deduct the childcare expenses on your federal returns. The more straightforward approach, really, would be for each of you to handle it separately.

I am NOT an accountant though I did have professional advice - my mother - when I was getting started with all this. Feel free to email me though as noted, I’m not a pro so you’ll want to double-check on the laws where you are. And if you know a tax professional, definitely consult him/her.

4

Wanted to add - more opinion here of course - Another approach to this for your situation would be for your friend to be a full-blown employer, and for you to treat the sitter as a contractor. That’s really what’s going on; she has to report to your friend’s house, but for you it’s more like a daycare situation. In other words, keep the financial agreement strictly separate.

To keep things on the up-and-up, you could do a 1099 for her at the end of the year. Not sure if you’d need an EIN (Employer ID Number) but presumably the IRS web pages would tell you. This way you can be sure you’re OK with getting your flex spending money, and handling it properly tax-wise. And you don’t have the unmployment tax issue. To be strictly fair, I’d suggest grossing up her income to cover your share of the social security taxes.

We once had a nanny who preferred to be treated as a contractor (and really acted that way; half the time the kids were at her house, half at mine). We grossed up her pay to cover the FICA, and reported it all. I didn’t do a 1099 (didn’t know about it at the time) but since I did do a childcare credit form on my taxes (including her SSN etc.), the IRS certainly found out about her income.

That winds up being trickier for the nanny of course, as she’s got to file that extra tax form (Schedule C?) to handle the income from you.

5

Thanks for the good advice and insight. I think that might be the way to go here - have my friend be her employer and me just treat her like a contractor and do a 1099. I have some experience with the 1099 since my husband has done contract work in the past. I think since she is not working out of my home and only doing part time work for me it should be ok for me to do that. I do want to be able to use my flex account to pay her, or at least claim it as a deduction since it does end up being a decent tax break.