One of the most common questions (and misunderstandings) surrounding household employment is whether a family can provide their nanny a Form 1099-MISC (or 1099-NEC) at tax time and consider them an independent contractor rather than a household employee.
The short answer is “no.” You can’t give your nanny a 1099. Here’s why and answers to other commonly asked questions, from our friends at GTM!
What is Form 1099?
Form 1099 is used to report certain types of miscellaneous (Form 1099-MISC) or non-employee (Form 1099-NEC) compensation.
Non-employee compensation generally includes independent contractors, freelancers, sole proprietors, and self-employed individuals.
Before the 2020 tax year, these types of compensation were reported on Form 1099-MISC. But now Form 1099-NEC is used for non-employee pay.
These forms generally report payments made “in the course of your business” and not your personal payments. Wages paid to a nanny are not considered business-related so Form-1099 does not apply to household employment.
Is my nanny an independent contractor or self-employed?
Independent contractors are hired to perform a service. However, you do not have control over how the job is done or when and the worker uses their own tools, supplies, and equipment.
For example, a small business owner may enlist a graphic designer to create a new logo for their company. The owner may give details on how they want the logo to look and colors to incorporate as well as a deadline for the work to be completed. But the graphic designer controls the creative process, uses their own software programs to work on the logo, and works on the project at times they determine.
That graphic designer could be classified by that small business owner as an independent contractor.
However, the IRS considers nannies to be employees of the family and not independent contractors.
Household employees include housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee. Repairmen, plumbers, contractors, and other business people who provide their services as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do but also how they do it.
In general, you are controlling how your nanny’s work is done, setting their schedule, and providing the tools and supplies to do their job. That makes them an employee and not an independent contractor.
You are instructing your nanny how you would like your child looked after (feeding times, nap times, discipline, screen time, etc.). They also work according to a schedule you determine, typically when you need to be at your job. And your nanny will use your kitchen and utensils to prepare meals and your stroller to take your child out for walks.
Your nanny is not going to care for your child in a way that is against your desires. They are also not going to show up at your home when they are not needed to work. And while they may bring some of their own activities to engage your child, they are mainly relying on your supplies to do their job.
The U.S. Department of Labor has also weighed in on employment classification with their employment relationship characteristics. Of note for household employers are “the permanence of the relationship” and economic dependence. When you hire a nanny, they will work for you until the end of the relationship due to a lay-off, termination, or resignation. An independent contractor understands that they will work on a project until completion and that could signal the end of the relationship.
Your nanny is also generally dependent on their job with you for financial stability. An independent contractor offers their services to many different businesses often at the same time. If they lose a client, or a project is completed, they have other clients and work to provide income.
Classification is not based on whether the nanny works full-time or part-time, how they were hired, or how often they are paid.
What are the tax consequences of regarding a nanny as an independent contractor?
By treating a nanny, or any other household employee, as an independent contractor, families shift the entire tax burden to the worker and eliminate most of the paperwork and responsibilities that come with being an employer. In an employee-employer relationship, Social Security and Medicare tax obligations (commonly called FICA taxes) are split evenly. Independent contractors, however, pay both the employee and employer shares of FICA taxes.
What is Form SS-8?
Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) can be filed with the IRS to get a ruling on whether your household worker is an employee or independent contractor.
It can take up to six months for the IRS to respond to your request. If they confirm that your nanny is an employee, you will still owe employment taxes on all wages paid, not just from the classification determination.
Your nanny can also file Form SS-8. If you decide to classify your worker as an independent contractor, they can dispute that decision with the IRS. If a determination is made that your nanny is an employee, you will owe back taxes from the start of employment.
What is employee misclassification?
Treating your nanny as an independent contractor and not an employee is considered employee misclassification. The IRS deems this tax evasion as you are skipping your employer tax responsibility and leaving the entire obligation to your nanny to pay.
What can happen if I give my nanny a 1099?
As mentioned, you are committing tax evasion if you give your nanny a 1099. Get caught and you will owe back taxes, interest, and additional fines, which can easily run into thousands of dollars.
Your state tax agency will likely find out as well as the IRS, U.S. Department of Labor, state tax agencies have partnered to share information between agencies to help reduce worker misclassification and facilitate enforcement of the law.
Also, the IRS has no statute of limitations when auditing false or fraudulent returns, which would include employee misclassification, and collecting back taxes.
What tax forms should my nanny receive?
You must provide your nanny with Form W-2 if you:
- Paid them $2,300 or more in 2021 (or will pay them $2,400 or more in 2022) or;
- Withheld federal taxes regardless of their wages
Form W-2 must be provided to your nanny by January 31. A copy of Form W-2 and Form W-3 are submitted to the Social Security Administration by that same date.
If you are paying your spouse, a child under the age of 21, parent, or anyone under the age of 18, you do not need to pay or withhold employment taxes. There is no need to supply a W-2 to those workers.
However, if you pay someone under the age of 18 $1,000 or more during any calendar quarter, then you are subject to federal unemployment taxes and possibly state unemployment.
There is an exception. Wages paid to someone under the age of 18 are counted if “providing household services is the employee’s principal occupation.” If the employee is a student, providing household services isn’t considered to be their principal occupation.
For you, file Schedule H with your personal tax return. This form is where you report household employment taxes to the IRS.
What taxes are owed when employing a nanny?
You will owe 7.65 percent of your nanny’s cash wages in FICA taxes (6.2 percent for Social Security and 1.45 percent for Medicare). You are also required to withhold the same amount from your employee’s pay and remit both shares to the IRS.
On top of FICA taxes, you will pay six percent in federal unemployment taxes on the first $7,000 in cash wages. This is an employer-only tax. You will likely owe state unemployment as well. However, you may be able to take a credit against your federal unemployment taxes and reduce that rate to 0.6 percent.
While you are not required to withhold federal income tax from your nanny’s pay, it may be a good idea, so they are not stuck with their entire tax obligation when they file their return.
The easiest way to remit federal taxes – both employer and employee shares – is to make quarterly payments using Form 1040-ES.
IRS Publication 926 (Household Employer’s Tax Guide), as well as our Nanny Tax Guide, are excellent resources to learn about your responsibilities as a household employer.
Are there benefits to treating my nanny as an employee?
For you, there is the Child and Dependent Care Tax Credit, which you can claim on your personal tax return.
For the 2021 tax year, this credit for a family with one child increased from $3,000 to $8,000. For families with two or more children, the credit was raised to $16,000 from $6,000.
In past years, the amount of the credit was 20 percent of expenses so $600 for one child and $1,200 for two or more children. For your 2021 taxes, the amount of credit gradually decreases based on your family’s household income, but most should see some increased tax savings when applying the Child and Dependent Care Tax Credit.
Households with income below $185,000 will see a tax credit of 21-50 percent of expenses. If your household income is between $185,001 – $400,000, your tax credit is 20 percent. For households with income between $400,001 – $440,000 the tax credit starts to phase out.
Then there is a Dependent Care FSA offered through your employer. This is a pre-tax benefit account used to pay for qualified, out-of-pocket dependent care expenses like your nanny’s wages. By putting money into a Dependent Care FSA, you will reduce your overall tax obligation as funds are withdrawn from your pay and placed into your account before taxes are deducted. It lowers your taxable income (both for income and FICA taxes) so you end up paying less in taxes. How much you can save in taxes depends on your tax bracket and your state and/or local income tax rates. But most families will see at least a few – if not several – thousand dollars in tax savings.
For your nanny, they are covered by workers’ compensation insurance if they get hurt or sick while on the job. They also receive unemployment benefits if they lose their job through no fault of their own, are usually covered by state-mandated paid sick and family leave and other domestic worker protections. These benefits typically do not apply to independent contractors.
What if my caregiver provides services out of their own home?
If you bring your child to the caregiver’s home, they are not a household employee. That caregiver is self-employed and doing business as a sole proprietor. They do not receive a W-2 or a 1099 from you. You would pay them as you would any other service. Paying by check or electronically – rather than cash – would be best so there is a record of payments.
Make sure to get their Social Security Number or Employer Identification Number so you can claim the Child and Dependent Care Tax Credit on your tax return and use a Dependent Care FSA to reimburse your childcare expenses.
The caregiver would be responsible for reporting their income on their own tax return.
What if I am in a nanny share?
In a nanny share – where multiple families hire one caregiver to care for all children out of one of the family’s homes – the nanny is considered an employee of each family. They will receive a paycheck from each family on payday and a W-2 from each family at the end of the year. Learn more about how to set up a nanny share and understand taxes and payroll.
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