According to the 2013 Park Slope Parents Nanny Compensation Survey, a mere 15% of survey participants pay their nannies on the books. It seems those pesky “employer taxes” have a seriously scary reputation! The truth is, nanny taxes are not nearly as expensive or complicated as you’d think and being compliant entitles you to at least one tax break, regardless of your income level. The only restrictions are that the children under care must be under age 13 and both parents must pass the “work-related test,” meaning each is employed, looking for employment or a full-time student. If you have more than one dependent, you may be entitled to up to $2,500 in tax credits. In many cases, the tax savings offset most of the employer tax cost. For some, the savings can even exceed the cost of their employer taxes. So how do you take advantage? Our friends at Breedlove & Associates broke it down for us.
1) Many companies offer their employees the option to contribute up to $5,000 of their pre-tax earnings every year to a Dependent Care Flexible Spending Account (FSA). Because paying nanny taxes qualifies as a childcare expense, you can take advantage of paying these expenses tax-free. Costs that qualify for pre-tax spending include nanny salaries, taxes on nanny salaries, fees paid to babysitting or nanny agencies, and costs associated with daycare.
2) Regardless of income, household employers are entitled to a 20% tax credit on childcare expenses of up to $3,000 for one dependent ($600 savings) or up to $6,000 for two or more dependents ($1,200 savings) via the Child and Dependent Care Tax Credit. You can claim this tax credit by completing IRS Form 2441 as part of your personal income tax return at year-end.
If you only have one dependent under age 13, you’ll have to choose between the two tax breaks. For most families the FSA is the best option. If you have two or more dependents under age 13, you can take advantage of both tax breaks if your childcare expenses were greater than your FSA contribution.
SmartSitting is hardly an expert when it comes to nanny taxes. We’re just passing along the good word! Please consult tax professionals when it comes to handling your nanny tax obligations. For more information, contact our friends at Breedlove (888-BREEDLOVE) and tell them SmartSitting sent you.