Do-it-yourself guides to hiring a nanny, paperwork, and the nanny tax

The Ultimate Guide To Handling Nanny Taxes and Payroll Yourself


Overview

This step-by-step guide describes how my wife and I hire and pay our nanny. The guide starts with how to set up a business for your nanny and ends with the simple (and completely free) process we use for payroll.

The guide is structured around when certain tasks need to be completed: steps that need to be done once, yearly, quarterly, and monthly/bi-weekly.

We live in Seattle in Washington State. That is why this guide discusses some requirements specific to Seattle and Washington State. Most of the steps in this guide will be applicable regardless of where you live in the US. However, you will have to be aware of local rules and regulations. For example, your city, county or state can have specific rules about how much sick time you need to pay for, or if you are required to pay specific taxes for your nanny.

Finally, the guide also contains a reference section with links to the main official documents from the federal government and state agencies.

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One-Time Setup


Employer Identification Number (EIN)

Head over to this site to apply for an EIN online. If the link does not work for you for any reason, go to irs.gov and search for "EIN online". An EIN is required for paying federal nanny taxes, for creating a W-2 for your nanny online, and more.

Undeniably surprising: the Web site does not work 24 hours every day. You need to use it during the times that are mentioned on the IRS page. In our case, using the site outside of the given hours resulted in a random failure message, which did not correctly describe the reason for the failure.

When you are done, the IRS will give you an electronic confirmation that you received the EIN. Print this document and keep it safe with your other paperwork. The EIN is a core identification number (similar to your social security number, just for your business). So, it is good advice to handle it as such.

Employment Authorization Form (I-9)

The form I-9 exists for the purpose of verifying the identity of you nanny and for employment authorization. If your candidate does not have the required papers to work in the United States, you are not allowed to hire that person. Talk to your nanny during the interview process and make it clear that both of you need to complete the I-9 form. The form has a section that needs to be completed by the employer (you), and a section that needs to be completed by your nanny.

Our recommendation is to mention the I-9 form early during the hiring process. You want to be reasonably sure that your candidate has the required documents.

Here are the links to the documents: Main page | .pdf

W-4

The W-4 form (main page | .pdf) is about withholding federal income taxes for your nanny. Here is what the IRS says about the W-4 and household employers:

You're not required to withhold federal income tax from wages you pay to a household employee. However, if your employee asks you to withhold federal income tax and you agree, you'll need a completed Form W-4, Employee's Withholding Allowance Certificate, from your employee.

In other words: you don't need to withhold taxes for your nanny (at least today, please check the recent versions of the cited document). In my personal situation, my wife and I agreed to do the withholding for one of the nannies we employed, and it turned to complicate payroll quite a bit. In particular, every two weeks when I created the payroll document and wrote the check, I had to consult the tables in this document to find out how much money to withhold. Because there was no simple rule for calculating how much to subtract from the paycheck, this always caused additional manual work when dealing with the Excel sheet I was using for payroll.

On the other hand, if you don't withhold federal income taxes, you should be very, very clear with your nanny what this means! Because nobody is doing the withholding, your nanny essentially gets overpaid with every paycheck. So, when she or he prepares the yearly income tax declaration, the IRS still wants the money, which will result in a big payment request from the IRS to your nanny. In fact, the payment can be so big that your nanny might pay a penalty. To work around this penalty, your nanny would have to make estimated tax payments during the year. Please see here for more information about estimated tax payments.

Some people still recommend completing a W-4, even if you don't want to withhold any taxes as an employer. Why? One reason is that a completed W-4 form gives you information like the social security number (SSN) of your nanny. You will need the SSN for other tasks later on, for example when filing wage reports to your state. So, if you don't complete a W-4, make sure your nanny gives you her SSN. And keep it in a safe place!

Different states have different requirements for household employers. The following site provides an excellent overview of the rules in every state: Nanny tax laws by state.

The following gives more information about the formalities in Washington State (because my wife and I have the privilege to live here).

In Washington State, you as a household employer need to:

  1. Get a Washington State business license.
  2. Register every new employee with the Department of Social and Health Services.
  3. Report quarterly wages as well as pay worker's compensation and unemployment insurance.
  4. Follow reporting requirements and pay premiums according to the Washington State paid family and medical leave program.
You need to do step (1) only once, step (2) whenever you hire a nanny, and (3) and (4) every quarter.

Here and here is information about the general requirements directly from the Washington State site. Here is more information about the Washington State paid family and medical leave program.

Here is more information about the one-time setup steps:
  • Secure Access Washington (SAW)

    Washington State offers a variety of services for employers online. This is extremely convenient, and a fantastic job done by our state! Most of these services are provided under the umbrella of Secure Access Washington (SAW). The main entry page to SAW is here.

    You can create an account directly from the main SAW site. You might want to follow the next steps and create a SAW account as part of your business license application.

  • Get a Washington State business license online.

    Head over to this site for more information and to this site to directly start the application process. If you don't have a SAW account, sign up and register for SAW. Then follow the steps for getting your Washington State business license. During the application process, there should be an option for household employees.

    After finishing the application and pay the required fees, we had to wait several days for the application to be processed. A week or two later, Washington State also sent us a letter with the UBI (another identifier for your business) and our tax rate for worker's compensation and unemployment insurance.

  • Report a nanny to Washington State. There is a requirement to report your nanny within a certain time period of starting her employment (when we went through the process, this was 20 days.) You can do this online with the Department of Social and Health Services here.

Yearly Tasks


W-2s and a W-3

Every year, generally no later than Jan 31st (follow this link for the official guidelines), you need to give your nanny a W-2. This is the same kind of document you get from your employer. The W-2 is essential so that your nanny can complete an annual income tax declaration.

As an employer, you also need to file the W-2s and W-3 with the government.

The great news is that the Social Security Administration provides a completely free online tool for generating and filing W-2s (one W-2 per nanny) and your W-3. Head over to this site to find out the details about the online filing process, filing deadlines, and more. Then go to Business Services Online, log in to or register for an account, and follow the steps to create your W-2s and W-3, and file them.

What kind of information you need to create the W-2s and W-3? You will need your nanny's Social Security Number (SSN), payroll information, and more. If your nanny completed a W-4, you can get the SSN from that document. Get the payroll information (how much you paid, how much social security tax you paid, etc.) from the documents/tools/Excel sheet you used to manage the nanny's payroll.

Yearly Federal Income Tax Declaration

If you have household employees, you typically need to file Schedule H (Form 1040) -- called "Household Employment Taxes" -- with your yearly federal income tax declaration. Official instructions are available from the IRS. What you need to do might depend on your concrete personal situation.

You can find more information here.

I am using TurboTax for my wife's and my own federal income tax declaration, and I was able to complete the necessary forms with it.

Also, remember that the amount you owe the IRS might drastically increase when you withhold federal income taxes for your nanny. As mentioned here, you typically are not required to withhold. However, if you do, you might run the risk that the IRS will charge you with a fine if you owe too much money with you federal income tax declaration. To avoid this, consider (1) increasing the amount of money your employer withholds from your income or (2) paying estimated taxes through other means. This is explained in more detail here.


Quarterly Tasks


File Quarterly Wage Report and Pay Unemployment-Insurance Taxes -- Washington State

In Washington State, you are required to report wages and pay worker's compensation and unemployment insurance every quarter. If you forget, they will charge you a fine. You even have to report if you did not employ a nanny in a quarter -- as long as you have your business.

The good news is that Washington State offers a great online experience for completing this task through their online portal Secure Access Washington (SAW). Here are some links and steps that we followed:
  • If you don't have an account for SAW, go to this site and create one.
  • The system that is used to file wage reports and pay unemployment-insurance taxes online is called Employer Account Management System (EAMS). Here is information about that system from the Washington State site.
  • If you haven't yet added EAMS to your SAW account, you need to do this. The steps for doing this are described on the same site.
  • If you already have a SAW account and EAMS added to your account: login to SAW, select EAMS, and file your wage report as well as pay the unemployment-insurance taxes. The site is easy to use. General information is again on this site.

Quarterly Reporting for the Paid Family and Medical Leave Program -- Washington State

In Washington State, you are required to fulfill the reporting requirements and submit payments for the state's paid family and medical leave program.

Washington State offers a great online experience for completing this quarterly task through their online portal Secure Access Washington (SAW). Here are some links and steps that we followed:
  • If you don't have an account for SAW, go to this site and create one.
  • The system that is used to file wage reports and pay program premiums online is called Paid Family and Medical Leave (PFML). So, go to SAW and add PFML as a new service to your account. Here is the official information of how to do this.
  • If you already have a SAW account and PFML added to your account: login to SAW, select PFML, and file your report as well as pay the premium. The site is easy to use. General information is again on this site.

Pay More Taxes During the Year

If you owe too much in taxes with your annual federal income tax declaration, the IRS may charge you with a penalty. Now, if you agreed to withhold income taxes for your nanny during the year, the likelihood that you get into this situation is much higher than normal. As a result, you might need to make higher tax payments during the year.

If you are not self-employed, you can just ask your employer to withhold more taxes during the year. You can typically do this by filing an updated W-4 form with your employer. If you are self-employed, consider making estimated tax payments during the year. Information about this process is here. The site also links to the corresponding IRS form you need to use, and this form contains guidelines designed to help you to determine how much taxes to pay in estimated taxes.

This site from the IRS also has a section about paying estimated taxes.


Bi-Weekly/Monthly Tasks


Payroll

Every two weeks (or once or twice a month, or whatever period you agreed on), you will have to give your nanny a payroll slip and pay her for the services rendered.

The following is a description of how we handled payroll for the nannies we employed. Please look at our disclaimer and note that we are no tax or payroll experts. The following is the process we used after trying to understand all applicable rules and regulations. However, while this process has worked well for us, we cannot guarantee that it will work for you. Your personal situation might require changes, and tax laws change all the time. Please keep this in mind.

We agreed with our nannies to pay once every two weeks, and included this agreement in the nanny's contract.

Every two weeks, I would use the following template to prepare the pay slip: Excel | .pdf.

You could use this as a starting point and adapt it to your own situation. But please look at the formulas and make sure you understand the background.

Whenever we hired a new nanny, I made sure that all the information between left and right angle brackets (< >) in the spreadsheet is up-to-date.

Every year, the Employment Security Department of Washington State (of course, this depends on the state you live in) sends us a letter informing us about (1) our new Washington State tax rate and (2) the income limit up to which the tax is due. I would then go to the Excel sheet and update the tax rate. The income limit was so high that it is not reflected in the Excel sheet. For example, for 2019, it is $49,800. This is much more than we can afford to pay a nanny in a year. If you hit this limit, you will need to reflect this in the spreadsheet.

Washington State also has a Paid Family and Medical leave program with a separate tax rate. If you don't live in Washington State, you can delete this line. Finally, the City of Seattle also has a mandatory Paid Sick and Safe Time (PSST) ordinance. This ordinance comes with some reporting requirements. If you don't live in Seattle, you can disregard all the PSST-related entries.

Then, every two weeks, I updated the information in yellow in the document. The items are:
  • Payroll date: the date you hand the pay slip to your nanny.
  • Service dates: the time period for which you are paying your nanny.
  • Year-to-date hours on previous paycheck: the amount of money you have paid the nanny so far.
  • Hours: the number of hours worked in the time period you paid for.
  • Federal income tax withholding for this pay period: If you agree to withhold federal income tax for your nanny, it needs to be reflected on the pay slip. How to determine the correct amount to withhold? Check the W-4 the nanny filled out about the number of withholding allowances claimed by your nanny. Then refer to the tables in this document to determine how much to withhold: Main page | .pdf
  • Federal income tax withholding year to date: I calculate this number from the previous paycheck plus the withholding for this period.
  • Paid Sick and Safe Time (PSST) reporting: The City of Seattle has a specific Paid Sick and Safe Time ordinance. This ordinance comes with specific reporting requirements. Delete these entries if you are not living in Seattle.
  • Paid holidays and vacation: I updated these fields whenever we paid for holidays or vacation for our nanny.

You can find a step-by-step guide to how we create nanny pay stubs, including screenshots and examples, here.


References


Resources

There are rules and regulations for household employers from the federal government, your state, and possibly even your city. The first step is to get informed:

The official information provided by the federal government and your state's and city's agencies is what you have to abide by. And depending on your personal situation, there might be steps that you have to take that are not discussed on this site. So, you will have to spend some time studying the documents.