Do Your Own Nanny Taxes — for free!

When we first did the math on raising twins in D.C., hiring a nanny instead of day care seemed to make sense. But I knew that that would also mean doing paperwork and paying taxes. With two new babies, that seemed overwhelming so I signed up for a service, who did most of the paperwork. It cost me more than $1,000–not the taxes, just the service! The next year I decided that was more money that I was willing to spend, so I tried doing it myself, I DIY my nanny taxes. Three years later, I’m here to tell you it’s pretty easy, and yes, you too can pay your nanny-taxes yourself!

Here is what you need to know.

Do I need to file taxes?

Yes, if you pay for anyone to work in your home at more than $500 in a quarter (D.C.’s standard), or $2,100 in a year (federal standard), you need to file taxes. Fortunately, you get a special simplified status as a household employer, so it’s a lot simpler than being a business owner. And frankly, the IRS makes things pretty easy. This article outlines most of what you need to know, but the official rule book is the IRS’s own Household employers tax guide, so see that for details, questions or unusual circumstances.

Get set up

To set up, start by getting employer numbers, which will take you all of 30 minutes. You’ll need a federal EIN number which is easy to do online here, and one for the District of Colombia, which is also easy to do online here. Remember, for all of these you are a Household employer! That’s important, because things are simpler for you. You also need to have your nanny fill in a W-4 form, which you can print out here. Once s/he has signed it, keep it for your records. I recommend keeping a scan or photo of it, too, just in case the paper copy gets damaged. This is also a good way to make sure you and your nanny are on the same page about his/her pay and tax withholdings.

Keep good records

This is key — and it will be good for your relationship with your nanny too. Every week I spend 10-15 minutes filling in my spreadsheet, printing her pay stub and paying my nanny. It’s a good investment of time because she knows I’m on top of things and she gets an actual pay stub, if there are any discrepancies that’s our chance to clear them up.

D.C. and the federal government require that you do two things for household employees:

1. Keep an hours-sheet throughout the year to record exactly how many hours your nanny works. You could do this on a piece of paper, but I like to keep an Excel sheet because it helps me make pay stubs, so I’m sharing my DIY nanny payroll spreadsheet that you can download here.
2. Withhold taxes. I’ve put the tax rates right into this handy spreadsheet (above), but you can also check the tax rates with the IRS. This year it’s 6.2% for Social Security tax and 1.45% for Medicare tax, but they do change year to year.

Remember employers and employees split the tax burden; you are withholding your nanny’s share of his/her own income taxes and paying it on his/her behalf, but you will have to pay that same amount yourself too. So, at the end of the year, you need to be ready to pay your nanny’s share (the amount you withheld), plus the same amount for your share, plus an additional 3.2% for D.C. taxes — total that about 19% on top of what you pay your nanny. I find it helps to put this into a savings account as we go, so we have it set aside. D.C. also lets you make quarterly payments, but I find that to be more of a hassle. It’s up to you. Withholding Federal Income Taxes (FIT) is not required for household employers, but the spreadsheet will calculate those for you if you choose to do that. If your nanny prefers you withhold FIT you can find the rates from the IRS Employer’s Tax Guide.

File at the end of the year

By the end of January of the following year, you will need to report the hours your nanny has worked and print out a W-2 form – that sounded so scary to me the first time I thought of it, but it turns out that using the IRS’ handy online tool is a cinch!

Now it’s time to pay the bill. Fortunately, D.C. will send you the very envelopes you need to submit your nanny’s taxes; just add a check and mail. For the federal government, you can just log in and pay online at their Electronic Federal Tax Payment System here.

Voilà! You’ve done your own nanny taxes and saved yourself thousands in fees for a redundant service.  Congratulations!

Disclaimer: I do my own taxes, but am not a tax professional. If you do not feel comfortable, see a tax professional or use a more reasonably priced service like Poppins Payroll.  Most of the links in this post are for household employers who live in D.C.–if you live in Maryland or Virginia, you will need to log into to your states tax system.