Tax Day is steadily approaching! Have you sent out your W-2 forms to your childcare workers yet? Nannies, babysitters, and other types of childcare professionals who earned over $600 in their trade are required to pay taxes on their earnings, no matter their age. Whether you are a nanny looking for the best way to file your taxes or you’re a parent wondering how to correctly report your nanny’s earnings, use Benzinga’s handy guide to master childcare taxes.
How Do Nannies Get Taxed?
Nannies and childcare professionals are two of the most commonly miscategorized professions during tax season. Many parents who employ a nanny or babysitter incorrectly believe that they’ve hired an independent contractor and that they only need to send the contractor a Form 1099 at the end of the year. Unfortunately, these parents also then impose restrictions on the caregiver that transforms their role into that of an employee without providing the legally required benefits. The IRS has recognized this issue and has even explicitly added babysitters and nannies to the list of common household employees.
If you are a nanny or other childcare professional, ask yourself the following questions:
- Do I have a certain workspace I must use? Am I required to go to a specific business or residence to do my work?
- Are working hours imposed on me?
- Do the parents of the children I care for have control over how I do my job? Do they control the tools that I use (toys, books, diapers, etc.) that I use to care for the children?
If you answered “yes” to any of the questions listed above, you are an employee, not an independent contractor. If you’ve received a Form 1099 in the mail instead of a Form W-2, you have been misclassified. Employers may misclassify employees as independent contractors for a number of reasons:
- They may genuinely not understand the difference between an employee and a contractor.
- They may not want to pay their legally required portion of Social Security and Medicare tax due as an employer.
- They may not want to cover other legally required benefits of employees like workers’ compensation, limited hours for underage workers or scheduled rest breaks.
Whether your employer has misclassified you by accident or intentionally, you’ll lose money by maintaining independent contractor status, as independent contractors are required to pay the entirety of their self-employment taxes. If you believe that you have been misclassified as a contractor, talk with your employer first. Explain the difference between filing taxes as a contractor and filing taxes as an employee and present them with the IRS’s criteria for determining the employment situation. Ask your employer why you’re considered a contractor and not an employee. If the employer refuses to reclassify you, use Form 8919 to report your unpaid self-employment tax as a burden on the employer.
How to File Nanny Taxes
Improvements in electronic filing systems and tax software for the self-employed have made filing taxes easier than ever before. Follow these steps to avoid penalties and fees when filing your taxes:
For the Household Employer
Follow these steps..
Step 1: Download and fill out Form W-2
Your first step when filing employee taxes as an employer is to download Form W-2 from the IRS. You can find a PDF and more information on who needs to file a Form W-2 from the IRS’s official website. You are required to fill out and send an individual Form W-2 to each employee who works in your home from whom you have withheld income tax or Social Security and Medicare.
You may not submit a single W-2 with all of your employees’ information included. For example, you do not have to submit a W-2 for contractors who have done one-time work in your home (like a siding repairman or a plumber) nor do you have to submit a W-2 for employees to whom you paid less than $600 in a single year. Gather information from your bank records and find out exactly how much you paid your employee in wages and how much money you withheld for taxes.
If you need an employee’s information, consult the Form W-4. If you did not have your employee fill out a Form W-4, request that he or she fill one out as soon as possible. After you have this information, you can begin filling out your W-2.
The W-2 has multiple forms you’ll need to fill out, but they all contain very similar information. First, fill out Copy D (the last one) and set it aside — this is intended to be retained for your records. Then, fill out Copy A (the red one) and prepare to send it to the Social Security Administration (SSA); do not send Copy A to the IRS. Then, fill out the other forms (Copies B, C, and 2) and give them to your employees. Most employers choose to mail these forms, but you may also submit them electronically if you have a secure way of doing so.
Step 2: Fill out Form W-3
Form W-3 is basically a summarization of what you’ve listed on your Form W-2 and must be mailed to the SSA alongside your Copy A. If you submit your W-2s online through the Business Services Online service, you don’t need to worry about sending in a W-3.
Step 3: Send in your forms
Review that you’ve filled out your forms and that all information is correct. Then, mail your forms to the following address: Social Security Administration Direct Operations Center Wilkes-Barre, PA 18769-0001 If you prefer to use a private courier (like FedEx or UPS), use the following address instead: Social Security Administration Direct Operations Center Attn: W-2 Process 1150 E. Mountain Drive Wilkes-Barre, PA 18702-7997 This year’s deadline for mailing W-2s and W-3s is January 31, 2019. If you have forms from the 2018 tax season that have not yet been mailed, fill them out and mail them immediately to minimize penalties.
Step 4: File state taxes
If your state imposes an income tax, you’ll need to fill out and mail in Copy 1 as well. Determine your state’s income tax collection center and remember to complete Copy B by January 31.
For the Nanny
Follow these steps..
Step 1: Collect your W-2 from your employer
Your employer should provide you with a few W-2s: Copies B, C, and 2. Copy B should be filed with your federal income tax return if you file your taxes by hand. If you use tax preparation software to file your return, you can upload Copy B to your software or input the information manually. You are free to keep Copy C for your records.
Step 2: Download and fill out Form 1040
Good news! The federal taxation process has been greatly simplified for 2018 — many regular salaried and hourly employees now only need to download and fill out Form 1040 when filing federal taxes. You can download Form 1040 directly from the IRS or you can contact the IRS to request that a representative mail you a paper form. You’ll need to have the following information on hand when completing your return:
- Proof of identification
- Information on your filing status and state residency
- Social Security numbers for you, your spouse (if filing jointly) and any dependents
- Information on what you paid in taxes last year or quarterly, if applicable
- Your W-2
- Proof of any deductions, exclusions, or credits that you’re eligible for
If you use tax software to complete your return, your program likely already has Form 1040 loaded into its system and will automatically complete the form for you as you progress through the questionnaire. If you file by hand, download and complete Form 1040 and package it along with your W-2 Copy B. Then, mail your package to the IRS collection address closest to your address.
Step 3: File state taxes
If your state imposes an income tax, you’ll need to send Copy 2 to your state’s collection agency. Fill out Copy 2 and package it while filing your state income taxes. If you are using tax preparation software, your program will likely impose a similar questionnaire as it did when you were filing your federal taxes to determine how much you owe and where you should send a check.
No matter if you’re an employer or an employee, consider using a tax prep software program to assist you when filing your return. Most taxpayers don’t have the time to sort through the long and arduous tax code to learn about what credits and deductions you’re eligible for. Failing to claim the right deductions can force you to pay more than what you owe in taxes.
When you file using tax software, your program will automatically apply credits and deductions to your account, saving you money with no extra effort. If you don’t already have a favorite tax software program, check out some of our favorite free options first.