As a childcare professional, you have one of the most important and noble jobs in the world – to nurture, protect, educate, guide and inspire children. You should view yourself – and demand to be treated – as a professional. In part, this means making sure that your compensation is handled accurately, fairly and legally.
This is especially important for nannies because often families who are new to employing nannies have a limited understanding of the payroll and tax laws governing household employment. As a result, it is common for families to incorrectly withhold & remit their nanny’s taxes or to miss-classify their nanny as an “independent contractor” by providing a Form 1099 at the end of the year. Both scenarios are illegal and potentially expensive and time-consuming for everyone involved. Worse, they end up depriving nannies of the benefits that other professional workers enjoy.
To avoid these types of situations, it is important to understand the basics of the tax process:
- Your employer withholds Social Security & Medicare (collectively known as FICA) from your gross wages at a rate of 7.65%.
- Your employer also withholds federal income tax from your gross wages (the exact tax rate depends on how many allowances you choose on Form W-4 and your marital status). By withholding federal income taxes each pay period, you are making pre-payments against your year-end tax liability so that, at the end of the year, you will end up with a very small payment – or better yet, a small refund.
- The family remits your FICA and federal income taxes each quarter – along with a dollar-for-dollar match of your FICA taxes (both your portion and your employer’s portion go directly into your retirement account with the Social Security Administration…because of the employer matching and the compounding of interest, most nannies will receive nearly $5 for every $1 they contribute!).
- The family pays a few small employer taxes, including unemployment taxes, which provide you with financial assistance in case of unemployment.
- The employer provides you with a Form W-2 at the end of January. This form itemizes your earnings for the tax year as well as all your pre-paid taxes. You use Form W-2 to complete your personal income tax return.
………Next time we will discuss the benefits of being paid legally!
Information supplied by Breedlove & Associates. Founded in 1992 – by household employers for household employers – Breedlove & Associates is a full-service, full-support tax & payroll service. For more information regarding employment taxes call 1-888-273-3356 or visit www.breedlove.com