When a household hires somebody to work of their residence, like a nanny, housekeeper or senior caregiver, they turn out to be an employer and have employment tax obligations.
These are generally referred to as “nanny taxes” and embody the employer portion of FICA (Social Safety and Medicare) and federal and state unemployment insurance coverage. The household may have to make small contributions to a state-mandated paid go away program. All informed, most family employers pay about 9-12 % of their employee’s gross wages in nanny taxes.
Now, the excellent news! Listed here are 5 methods to assist your shopper cut back – and probably cowl in its entirety – their nanny tax duty.
1. Dependent Care Versatile Spending Account (FSA)
A Dependent Care FSA – supplied by means of your shopper’s employer – units apart pretax cash to assist pay for certified out-of-pocket childcare prices like wages paid to a nanny. Your shopper can contribute as much as $5,000 as a person or as a married couple submitting collectively, or $2,500 for a married particular person submitting individually. Which means, for a married couple, every dad or mum can contribute $2,500 to their very own Dependent Care FSA. Since these contributions are made pre-tax, they cut back your shopper’s taxable earnings.
Relying on the place your shopper lives and their tax bracket, it’s estimated they’ll save 32-45 % on the cash they contribute to their FSA. For instance, if a married couple from New York that has taxable earnings of $350,000 and is submitting a joint return places the utmost quantity into their FSAs, they’ll save about $2,300 on their childcare prices.*
2. Youngster and Dependent Care Tax Credit score
The wages paid to a nanny are additionally a certified expense for the Youngster and Dependent Care Tax Credit score. For the 2022 tax yr, the Youngster and Dependent Care Tax Credit score returns as much as $3,000 in bills for a household with one youngster and $6,000 for households with two or extra kids. Households with an adjusted gross earnings of $43,000 or extra can take 20 % of their bills as a credit score. Which means $600 for one youngster or $1,200 for 2 or extra kids.
Your shopper can’t use the identical expense for each a Dependent Care FSA and the Youngster and Dependent Care Tax Credit score. If they’ve $5,000 in childcare bills and are reimbursed by means of a Dependent Care FSA, they’d not have the ability to declare the Youngster and Dependent Care Tax Credit score.
Nevertheless, if they’ve childcare prices leftover after maxing out their Dependent Care FSA, they’ll declare these bills with the tax credit score. For instance, if a household paid their nanny $11,000 or extra and has a minimum of two youngsters, they are often reimbursed $5,000 by means of their Dependent Care FSAs after which declare $6,000 with the Youngster and Dependent Care Tax Credit score.
3. Certified Small Employer Well being Reimbursement Association (QSBERA)
By providing pre-tax well being advantages to their nanny, your shopper can cut back their nanny taxes. Not solely does the caregiver obtain well being advantages, however they will even see a discount of their taxes. It’s a win-win.
A QSEHRA reimburses a family worker for medical health insurance protection bought on the person market or by means of the healthcare alternate and/or for out-of-pocket medical, dental and imaginative and prescient bills.
Your shopper can fund the QSEHRA with as much as $5,450 for a nanny who’s single and $11,050 per worker with a household. These contributions will not be taxed for the household or their worker.
Your shopper would minimize their nanny’s gross wages by the quantity they contribute to a QSEHRA. This reduces their taxable earnings, reducing the quantity your shopper owes in FICA taxes.
For instance, a household hires a nanny to work 40 hours/week at $20/hour. Primarily based on the caregiver’s gross wages of $41,600, your shopper would owe $3,182 in FICA taxes.
Let’s take the identical situation however as an alternative your shopper provides a complete compensation package deal of $36,150 in wages and $5,450 contributed to the worker’s QSEHRA. The household would owe $2,765 in FICA taxes, which is a financial savings of $417.*
Be mindful when providing a complete compensation package deal that family staff nonetheless have to be paid an hourly charge of a minimum of the prevailing minimal wage, which is the very best of the federal, state or native charge.
4. Instructional bills and scholar loans
Your shopper could make tax-free funds of as much as $5,250 per yr towards their employee’s certified academic bills corresponding to tuition and textbooks. By 2025, scholar loans are additionally thought-about a certified academic expense. The CARES Act of 2020 briefly expanded the regulation to incorporate scholar mortgage compensation help as a certified academic expense. The 2021 stimulus package deal prolonged this provision by means of 2025.
This tax-saving profit is right in case your shopper employs a university scholar or latest graduate. Like a QSEHRA, funds towards an worker’s certified academic loans may be a part of a complete compensation package deal and excluded from a employee’s taxable earnings, reducing their gross wages and leading to tax benefits in your shopper.
Contributions made above the financial restrict are typically thought-about taxable wages topic to all employment taxes. Additionally, the utmost quantity contains both education-related bills, scholar mortgage funds or a mix of each.
5. Certified transportation and parking bills
Your shopper’s family worker can put aside $280 in pre-tax {dollars} every month for transportation bills and that very same quantity for parking bills. This reduces their gross earnings and lowers each their and your shopper’s tax obligations.
Transportation bills embody public mass transit (subway, prepare, busses, ferries, and so on.) passes, tokens, fare playing cards and vouchers in addition to vanpooling. Tolls and fuel will not be certified bills. Parking bills embody charges incurred when parking at or close to your shopper’s residence and parking at or close to a location from the place the worker commutes through mass transit or commuter freeway car. Certified bicycle commuting reimbursements are not eligible as a tax-free profit. Nevertheless, your shopper can present the bicycle profit as a taxable profit.
What This Means for Authorized Pay
The burden of paying nanny taxes ought to by no means be used as an excuse for hiring a family worker “beneath the desk.” Whereas authorized pay is all the time the suitable factor to do to keep away from bother with the IRS and state tax and labor businesses, households can simply cut back – and even get rid of – their employer tax duty by means of pre-tax advantages, tax credit and/or their Dependent Care FSA.
* These are additionally pattern calculations primarily based on state and federal tax charges, typical pay ranges and allowances and shouldn’t be thought to be formal tax recommendation. Your shopper’s particular person outcomes might differ.
