Can You Write-Off Nanny Expenses? Yes, Here’s How
A taxpayer can partially write-off nanny expenses as long as the nanny is paid legally, the child is under 13 years of age, and both spouses are working. This tax break is typically applied one of two ways: through a tax credit when filing income taxes, or through a Dependent Care Flexible Spending Account.
Here’s What We’ll Cover
What Is a Dependent Care Flexible Spending Account (DCFSA)?
A Dependent Care Flexible Spending Account allows families to set aside funds pre-tax for dependent care services such as preschool, childcare and summer camps. Funds in a DCFSA can also be used for a spouse or relative who is physically or mentally incapable.
A DCFSA is set up through a taxpayer’s workplace. A predetermined amount is withdrawn every pay period, pre-tax, and deposited into a special account on an employee’s behalf. The employee cannot access the money directly. Once he has incurred the expense, he is required to fill out a form and provide proof of payment. At that time, the company will reimburse him.
The limit of an FSA is $5,000 per year for married couples, or $2500 individually.
Can You Get a Tax Credit for Nanny Expenses?
A taxpayer can get a deduction of up to 35 percent on expenses for a nanny, capped at $3,000 for one child or $6,000 for two or more children.
A taxpayer can apply for both a DCFSA and tax credit, but not for the same expenses.
How Much Can You Pay a Nanny Without Paying Taxes?
If you pay $2100.00 or more in wages to your nanny, then as an employer, you are required to pay employment taxes. Because you are directing how the nanny should look after your children, and because you provide her with the equipment and supplies to do her job, the IRS considers her to be a “household employee”. As such, taxes need to be paid.
This household employee classification also applies to other household help, such as butlers, caretakers, cooks, drivers, housekeepers and more. You can see the IRS’s Household Employer’s Tax Guide here.
The taxes that need to be paid are: Social Security, Medicare and federal and state income taxes. Some states, like Alaska and Florida, do not charge individual income tax.
To hire a nanny or a household employee, one must apply for an Employer Identification number (EIN). An application for an EIN can be done here, on the IRS’s website. The EIN will be used for identification purposes on tax returns and other related documents.
Can a Nanny Be Self-Employed?
No, a nanny cannot be considered self-employed. “Self-employed” usually refers to a situation where a contractor is not on a payroll (receiving a regular check). Typically, a self-employed contractor provides their own equipment and determines their own hours. None of which apply to a nanny.
Do I Pay Taxes as a Nanny?
Yes, by law as an employee, you are required to file and pay taxes. The taxes are: Social Security, Medicare, FUTA (Federal Unemployment Tax Act) and both federal and state taxes. State taxes may not be applicable depending on where you live. An employer will typically make some or all of these deductions before paying you.
Paying these taxes can also help you later, should you need to apply for unemployment or other benefits.
Can You Pay a Nanny Under the Table?
It is illegal to do so. A nanny, if paid over $2100 a year, is considered a household employee and by law tax needs to be paid by the employer. Not making the proper tax payments can subject an employer to severe penalties and interest, including a charge of tax fraud.