×

What families should do once that summer nanny moves on

Many families hire a nanny during the summer months when their kids are out of school. But after the eight to 12 weeks of fun are over, it's important for families to tie up all the loose ends of this short-term employment before resorting back to the normal in-school schedule.

Believe it or not, the person you hired to care for your loved ones is considered your employee — even though it was only for a few weeks.

With that comes a few responsibilities from the Internal Revenue Service, so ask yourself the following three questions as a checklist to make sure your finances are good to go for the rest of the year.

Nanny with children
Carsten Koall | Getty Images

1. How much did you pay your nanny? Was it $2,000 or more? According to IRS Publication 926, if you hire a nanny to work in your home and pay him or her $2,000 or more throughout the calendar year, you have household employment tax responsibilities.

If this describes your summer situation, the IRS says you must withhold Social Security and Medicare (FICA) taxes from your nanny and pay an equal amount of FICA taxes yourself. But don't worry, when you do things by the books, the IRS will reward you. (Note: If you paid $1,000 or more to your nanny from April 1 through June 30, or July 1 through Sept. 30, you will owe federal and state unemployment insurance taxes, as well.)

2. Do you know about the childcare tax breaks? Not many people enjoy dealing with taxes, but for childcare-related expenses, the IRS has a couple of great tax breaks if you followed all the tax rules for your summer nanny.

The one that will save you the most money is a Dependent Care Account — a type of Flexible Spending Account offered through your employer. You would have needed to enroll in this benefit during your company's Open Enrollment period, but it allows you to set aside up to $5,000 to pay for qualifying expenses. Hiring a nanny happens to be one of those types of expenses.

"Household employment is a year-round process, so don't procrastinate and cause yourself extra headaches later on."

An FSA saves you money because the amount you put into it isn't taxable. Your savings are based on your marginal tax rate, but generally speaking, you can expect to save approximately $400 for every $1,000 you put aside.

If you never enrolled in an FSA or don't have one available, you can use the Childcare Tax Credit instead when you file your personal income-tax return in 2017. You'll fill out IRS Form 2441, which should be available to you on just about every piece of tax software on the market.

You can claim up to $3,000 in childcare expenses if you have one child, or up to $6,000 if you have two or more children. Most families get a 20 percent tax break on these expenses, so you'll save as much as $600 if you have one child and $1,200 if you have two or more.

The savings most families can realize are very good, especially when you take into consideration how little tax liability you accrue if only having a nanny for a few weeks. Most families will actually offset their tax costs by taking advantage of the tax breaks, and many go beyond their tax liability. This means they save enough to chip away at their overall cost of hiring the nanny in the first place.

More from FA Playbook:
'Tis the season ... to think about taxes
How to cut spending like Warren Buffett
Does your state tax your Social Security check?

Your Wealth: Weekly advice on managing your money

Sign up to get Your Wealth

Please enter a valid email address
Get this delivered to your inbox, and more info about about our products and service. Privacy Policy.

3. Do you have your nanny's contact information and personal information? You probably at least have your nanny's phone number, since you were in contact with him or her throughout the summer, but you also need to have an address and Social Security number. If you paid your nanny $2,000 or more during the summer, you'll need to fill out and send them a W-2 so he or she can use it to file taxes. You'll need your nanny's address, too, so you know where to mail it to.

If you're planning on using the Childcare Tax Credit, the form requires you to enter your nanny's Social Security number. If you don't have it, make sure to contact your nanny and explain why you need his or her number. Many people will be hesitant to give up this type of personal information.

Let's be honest. April feels like a long time from now, but you don't want to be dealing with any lingering tax issues from the summer at that time.

If you have outstanding tax liability, the state and the IRS don't let you reconcile it with your personal income-tax return. Household employment is a year-round process, so don't procrastinate and cause yourself extra headaches later on.

— By Tom Breedlove, director of Care.com/HomePay