In addition, you may be responsible for state and federal unemployment taxes, says Ellis. You'll owe these taxes if you pay your nanny at least $1,000 in any calendar quarter.
Depending on where you live, your nanny may owe local, state, and federal income taxes. She may want you to withhold income taxes based on the number of exemptions she declares, in which case she'll need to fill out a W-4 form. While you're not required to do this, it's a good idea, says Ellis. "This way the nanny doesn't face one huge payment at year's end," he says.
To reduce your childcare costs, find out whether your employer offers a flexible spending plan that allows you to set aside pretax childcare funds, Goldberg recommends. Or take advantage of the dependent-care tax credit. This is a credit toward taxes you owe based on how many children you have under age 13, says Ellis. It can reduce your federal taxes by $480 for one child or $960 for two or more children.
Not all employers pay their household employment taxes, but Goldberg and Ellis stress that you're breaking the law if you don't and you could face stiff penalties for noncompliance. What's more, paying the taxes allows your nanny to collect unemployment benefits if she's terminated as well as Social Security benefits when she retires.
You can find additional information in IRS Publication 926 at www.irs.gov. It lays out the rules in detail and includes a convenient state reference guide.
Copyright © 2003. Reprinted with permission from the September 2003 issue of Child magazine.