I hired a nanny. Is she my employee or an
A. Nannies and most other household workers are
employees of the family for which they work. The
difference between employees and independent contractors
hinges on the amount of control one has over the worker.
The IRS created a 20-point test to determine control and
has ruled that household workers should be treated as
think your worker might be an independent contractor,
feel free to call us at 914-946-7725. You can also
petition to the IRS using Form SS-8; however, that
ruling will take approximately 6 months.
What employee taxes need to be withheld?
A. Your employee’s taxes usually range from 15-20% of
gross wages. These include:
Half of Social Security & Medicare (7.65%)
Federal income taxes
State income taxes (if applicable)
Other taxes (disability insurance, NYC Resident tax)
Do I have taxes as a household employer?
A. Yes, household employers can expect to pay employment
taxes that amount to approximately 9-10% of their
employee’s gross wages. These include:
Half of Social Security & Medicare (7.65%)
Federal and State Unemployment Insurance
Other state taxes (a few states have small taxes for
things like workforce training)
As an employer, can I take advantage of any tax
A. Yes. To lighten the financial burden for working
parents, Congress has enacted tax benefits for families
through employer-provided dependent care assistance
(Dependent Care Account) and the Tax Credit for Child or
Dependent Care. However, these tax breaks are only
available if the employee is paid legally.
Dependent Care Account (also called "Flexible Spending
Account"). Most companies allow employees with child
or dependent care expenses to contribute up to $5,000 of
their pretax earnings to an individual Dependent Care
Account. The money in this account is then used to cover
childcare expenses, free of taxes. The savings are
approximately $2,300 per year.
Tax Credit. For those who don’t have access to a
Dependent Care Account, they can claim the Tax Credit
for Child or Dependent Care (Form 2441) on their income
tax return at year-end. Basically, they can take a tax
credit of 20% to 30% on qualifying childcare expenses.
But expenses are limited to $3,000 for one dependent or
$6,000 for two or more dependents. The savings from this
tax break are $600 - $1,200 depending on number of
many families, the tax savings actually exceed the
employer’s share of the taxes, meaning families can save
money by being legal!
What about overtime pay?
A. According to federal law, household employees are
entitled to overtime pay. Overtime must be paid at 1.5
times the regular hourly rate for all hours worked over
40 in a 7-day work week. If a household employee is paid
a salary based on a work week of more than 40 hours, the
employment agreement should explicitly state the regular
and overtime rates of pay.
example, an employee and family agree upon a gross
salary of $600 per week for a 45-hour work week. The
standard wage for the first 40 hours is $12.63 per hour;
the overtime wage for the remaining 5 hours per week is
$18.94 per hour; and the total weekly salary is $600.
limit is placed on the number of hours worked in a 7-day
work week, as long as the employment contract is
fulfilled and the employee is fairly compensated. Please
note that live-in household employees do not have to be
paid overtime but are entitled to regular pay for every
hour worked. (Exception: live-in employees in New York
state must be paid overtime for hours over 44 in a work
for more details as there are some additional exclusions
that may apply to shift workers.
What are the vacation, holiday and sick pay
A. Household employers are not required to provide paid
vacation, holidays and sick days. (Exception: San
Francisco families must provide paid sick leave based on
hours worked). These benefits should be agreed upon as a
part of the employment contract.
What role does Redlig Financial Services play in
handling payroll and taxes?
A. The payroll and tax process is quite detailed. Here’s
an overview of the services that we can perform on
behalf of our clients:
Research employment tax and labor laws to understand
Register for federal and state tax accounts.
Complete and file New Hire Reporting.
Identify and calculate taxes to withhold each pay
Track gross pay, net pay and taxes withheld.
Calculate the employer’s federal and state tax
Prepare and file state and federal tax returns
quarterly and remit the employer and employee taxes.
Prepare year-end tax documents (Form W-2, Form W-3,
Schedule H and State Annual Reconciliation).
Respond to IRS and state inquiries.
Monitor ever-changing household employment tax law.
Comprehensive services offered by Redlig Financial
Services can make this compliance process simple,
painless and affordable.
What is Workers’ Compensation?
A. Every state has a worker’s compensation system. Under
these systems, workers who become ill or injured on the
job are entitled to medical and lost-wage benefits with
a minimum of legal formality and expense. The systems
are based on the idea that the employee gives up the
right to sue for any injuries from work-related
accidents in exchange for receiving benefits regardless
of fault. Some states exclude household services from
the workers’ compensation system. If you are required
to carry it, or if you elect to carry it voluntarily,
please check with your homeowner's insurance provider
first. Often, umbrella homeowner's policies cover
domestic workers so you may already be covered. If not,
they can usually add a rider over the phone.
Are there any tax breaks if I offer health
A. Yes. When a household employer contributes toward
health insurance premiums, these dollars are not
considered taxable income, meaning neither employer nor
employee is required to pay taxes on that portion of the
compensation. Families may choose to pay the healthcare
premium directly to the health insurance company or give
these dollars directly to their employee. If the health
insurance contribution goes directly to the employee,
the family must keep a copy of a current health
insurance card as proof of insurance.
Can I run my nanny’s payroll through my own
A. No, this is illegal. Here’s a simple explanation: All
businesses are allowed to take tax deductions on
employee payroll. The logic is that employees are direct
contributors to the success of the business, and
therefore the owner is allowed a tax break on payroll to
offset some of this business expense.
has ruled that a nanny does not directly contribute to a
business; therefore, it is illegal for a business to
receive any kind of “tax break” on her payroll. Instead,
your nanny is considered a contributing member of your
household, so you are entitled to take a personal tax
break on her payroll as a childcare expense.