What is Nanny Tax?
The Nanny tax refers to certain tax law, and taxes owed by people who employ childcare workers in their homes. Such tax laws exist in many countries, including in the US, the UK, and Canada, and these complicated laws can be a significant hassle for parents who home workers. Theoretically, a nanny or babysitter doesn’t have to be employed full time in order for parents to be responsible for paying some forms of nanny taxes. In the US, for instance, nanny taxes may be owed by parents who pay more than $1500 US Dollars (USD) per year for babysitting services from the same person.
In most countries where the nanny tax exists, the taxes paid are like those any other employers would pay to the government when they have an employee. Most of the time, large employers remove taxes from their employees’ paychecks when they pay them. Herein lies the problem with the nanny tax. Many individuals don’t deduct these taxes, so they may end up having to pay the taxes out of their own pockets at the end of the year.
In places like the US, taxes include payments for state tax, federal unemployment tax, federal payroll taxes and payments to social security. Figuring out the exact amount to pay each tax agency can be challenging and parents must make sure they have a person’s social security information for accurate reporting. Complicated reporting means some people turn to tax agencies that specialize in calculating nanny tax for them. There exist a number of nanny tax firms that can help parents figure this information out, or parents might use an accountant for this purpose, though the latter is likely to be fairly costly.
Countries may each have their own rules about nanny tax exemptions. The US doesn’t require nanny taxes if a person is paid less than $1500 USD per year. Also some family members don’t incur the nanny tax if they’re paid more than this sum. For instance, those under 18 don’t necessarily have to pay taxes. If the parents employ one of their own children under the age of 21, these rules may not apply either. Spouses and the employer’s parents may be exempt from this tax too.
Given the complexity of nanny tax laws, those considering employing nannies or even using babysitting on a regular basis should find out what laws apply in their country. Each country has its own reporting requirements and exemptions. Good places to start research on any tax laws that may apply include websites for government tax agencies.
Written by Tricia Ellis-Christensen
