Last week we went over what to consider when budgeting for a nanny and employer tax responsibilities. Now that you know what you can expect to pay in nanny taxes, our friends at GTM look at 3 ways to reduce your nanny tax obligation!
Dependent Care FSA
If your employer offers a Dependent Care FSA (Flexible Spending Account), your nanny’s wages are a qualified expense. In 2022, you can set aside up to $5,000 in pre-tax dollars for your account. This reduces your overall taxable income. Depending on your tax bracket, you can likely save up to $2,300 in taxes. For the 2021 tax year, thanks to the American Rescue Plan, if you set aside the maximum of $10,500, you could see savings of up to $4,700.
Child and Dependent Care Tax Credit
You may also be able to use the Child and Dependent Care Tax Credit for any expenses not covered by your Dependent Care FSA. For the 2021 tax year, you can claim up to $8,000 of qualifying expenses – including wages paid to a nanny – for one child or $16,000 for two or more children. Your tax credit will depend on your adjusted gross income (AGI). Families with an AGI of $185,000 – $400,000 can take a 20 percent credit, which comes to $1,600 for one child or $3,200 for two or more children. This one-time increase in the credit came through with the American Rescue Plan.
For the 2022 tax year, the Child and Dependent Care Tax Credit returns to $3,000 for one child and $6,000 for two or more children with a flat 20 percent credit on expenses meaning a savings of either $600 or $1,200.
Pre-Tax Health Benefits
Yes, offering health benefits to your employee, can help lower your nanny tax obligation. This can be done by offering a QSEHRA (Qualified Small Employer Health Reimbursement Account) as part of their compensation package. Employees can contribute up to $5,450 for individual coverage or $11,050 for a family. For that nanny making $30,000/year, you could offer $24,550 in wages and $5,450 in health benefits through a QSEHRA. Just make sure you are still paying an hourly rate that is above minimum wage and accounting for time and a half for overtime. By lowering your nanny’s gross wages, you reduce your FICA tax obligation by more than $400 and your employee also cuts their FICA and federal income taxes.
With a QSEHRA, employees are reimbursed for health insurance coverage purchased on the individual market or through the health care exchange and for out-of-pocket medical, dental, and vision expenses. Contributions are not taxed for the employer or the employee. Reimbursements are also not taxed as long as the employee has a health plan that meets minimum essential coverage.
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