Know What You Need to Navigate Nanny Taxes

Tax season. The time of year when we all must come to terms with the tax consequences of our actions. With the passage of AB 5 in California (which requires most gig workers, including Uber and Lyft drivers, to be classified as employees rather than independent contractors) and the ever-increasing number of gig opportunities throughout the country, the classification question – independent contractor or employee? 1099 or W-2? – has become something of a national debate. But it’s by no means a new one.

As the first babysitting app that connects parents with on-demand babysitters on a national scale, we get a LOT of questions from both parents and caregivers about the proper classification of babysitters and nannies. Luckily, informal child care (a/k/a babysitting) has been “gig work” pretty much forever, so even before the Uberization of work, there was a lot of discussion (and a considerable amount of legislation and formal guidance from government agencies) in the childcare space specifically. At the same time, the internet is full of vague, sometimes scary, and often – dare I say? – intentionally misleading information produced mainly by companies in the business of handling payroll and HR issues for families with household employees, who would love you to believe that ALL domestic workers must be classified as W-2 employees.

My goal today is to provide an unbiased look at the classification of household employees, to help both parents and caregivers make good decisions about how to classify their own unique situations.

The Nanny Wars: A Quick History Lesson

Employing others to care for one’s children is not a new idea – in fact, I would argue that it’s truly “the oldest profession.” But most families don’t have elaborate household staff, and in many cases a nanny or babysitter is the only person a family pays to do any sort of domestic work inside the home. Perhaps due to the private nature of the relationship or the idea that lots of cumbersome paperwork is involved in turning one’s household into an employee-having business, many families historically paid their nannies and babysitters “under the table” (i.e. without reporting the income to the IRS at all, either as 1099 or W-2 work).

Then, in 1993, in an ordeal now referred to as “Nannygate,” President Bill Clinton’s first nominee for U.S. Attorney General, Zoe Baird, was scandalously found to have failed to pay social security for her children’s nanny, making every family with a nanny wonder if they too might have a problem. At the time, in addition to securing a federal tax identification number and proving the worker's legal status, household employers had to file 28 other forms a year, four of them yearly and six quarterly, in order to stay compliant with the law. Two years later, in response to Nannygate, Congress created a new schedule to Form 1040 that allows families to report household employees’ wages and pay applicable taxes once a year, on a single schedule to their own income tax return, making it much easier to comply with the tax laws for household employees.

But that leaves the question: What makes a household employee?

What Makes a Household Employee?

I have heard many people insist that every person who performs domestic work inside another’s home is automatically a W-2 “household employee” – which is not true, but it’s an understandable mistake. The first line of the IRS guidance titled “Employment Taxes for Household Employees” confusingly starts with the sentence, “Household employees include housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee.” But another IRS publication states that “individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled … are generally treated as self-employed for all federal tax purposes.” The one thing all of these IRS publications have in common is the main rule of thumb for determining whether someone is an employee or an independent contractor: “The worker is your employee if you can control not only what work is done, but how it is done.”

This can be a tricky question when it comes to nannies and babysitters. Most full-time nannies are trained by the families they work for in performing household duties in the precise way the family wants them done. Those nannies would almost definitely be characterized as employees. But there are certain specialty areas, such as special needs caregivers, post-partum doulas, and newborn care specialists, that are arguably hired to bring expertise (and often tools) unique to their professional skill set – and often are the ones telling the parents what to do, not vice versa. And then there are babysitters, who may arrive with their own set of activities for the children, or in some cases may arrive after the children are already in bed. In other words, it can be tricky to make a universal determination about who is “controlling” how childcare work is done.

As with most things, this analysis must take into account the specific facts of each situation. It frustrates me when people claim that there’s a universal “right” answer to this question. There isn’t. But there’s certainly a universally “safe” answer for families, and that’s to assume that all caregivers are employees and to treat them accordingly.

Seriously? Even a Once-a-Month Date Night Babysitter is a W-2 Employee?

If a parent is exercising control over how a babysitter cares for their kids, then yes, technically that babysitter is an employee. But fear not. To address this situation in particular, the IRS has established minimum thresholds for when a family’s obligations to pay taxes and issue W-2's on household employees kick in. As of 2020, parents are not responsible for employment taxes if they pay cash wages of less than $2,200 to any one babysitter over the course of the year, or pay total cash wages of $1,000 or more combined to all household employees (including babysitters) in any calendar quarter. (Read more in IRS publication 926 and tax topic 756.)

(Remember to check the laws in your own state to make sure you’re complying with them as well.)

If you live in California and are wondering if Assembly Bill 5 (a/k/a AB 5) applies to babysitters or nannies, the answer is admittedly a little murky. While AB 5 defines “employee” to include “any person employed by the owner or occupant of a residential dwelling whose duties are incidental to the ownership, maintenance, or use of the dwelling, including the care and supervision of children” (in other words, all caregivers), there is an exemption when such a person worked less than 52 hours or was paid less than $100 within a 90-day period. To make things even more confusing, AB 5 technically only applies to labor classification (i.e. workers’ comp) and not necessarily to state or federal income tax withholding requirements.

The upshot? If I lived in California, I’d definitely make a call to my insurance agent to make sure my homeowners’ or renters’ insurance covered workers’ comp for household employees at the very least.

If I Do Have a Household Employee, Do I Need to Hire a Payroll Service to Handle It?

Absolutely not. The changes to the tax code made after Nannygate made it super easy to report and pay taxes on nannies and other household employees. It’s a once-a-year thing, and is just a schedule to your regular tax return. You do need to register for an employer identification number (which can be done online, here), send your household employees W-2’s, and figure out how you want to handle withholding (read on for more about that) – which can be enough of a hassle that you might WANT to outsource it. In that case, there are a bunch of very affordable options to choose from.

If you do choose the DIY option, you should thoroughly familiarize yourself with your obligations (and probably consult a tax professional at some point along the way to help you get your system in place). Note that families don’t have to withhold federal income tax – and actually shouldn’t unless there’s an explicit agreement that federal income taxes will be withheld. You do have to withhold and pay social security, Medicare, and unemployment taxes, which means (in 2020) withholding about 13.65% and paying about 21.3% (including an extra 7.65% for your share of social security and Medicare). Some people elect not to withhold anything and just cover the taxes for their household employees – but if you do that, don’t forget you still have to issue a W-2, and you have to include the amount of taxes you pay on your employees’ behalf in their total income. (Lovely isn’t it?)

If I Determine My Nanny or Babysitter Is an Independent Contractor, Do I Need to Give Them a 1099?

Nope. The IRS requires 1099s “only when payments are made in the course of your trade or business.” (If you don’t believe me, check it out.)

So What Do I Do?

Every situation is unique, so you absolutely MUST make this analysis for yourself after consulting with your own advisors.

If you’re a parent and you think one or more of your family’s babysitters or other household workers qualifies as an employee, it’s probably not too late to fix it for 2019 (though it likely means you’ll have to pay the full amount of their social security, Medicare, and unemployment taxes yourself). Talk with your tax accountant about filing a Schedule H with your tax returns.

If you’re a nanny or babysitter and you haven’t received a W-2 for work you did last year, don’t forget that while it’s true that parents can get in trouble for mischaracterizing your income, you can also get in trouble for not paying income tax on the money you make. It’s everyone’s responsibility to get this right, so my advice to both parents and caregivers is to consult with your own tax advisors to determine the correct characterization for your situation and then be upfront in any ongoing child care relationship about how you think it should be classified and why. Keep good records of your classification decision and follow all the applicable state and federal rules and regulations.

Finally, for the record, I don’t personally have a view on whether it’s better or worse to be classified as a W-2 employee or independent contractor. I don’t think there’s a “morally correct” answer, and I know a lot of babysitters and nannies who strongly prefer to consider themselves self-employed – especially very seasoned specialists who bring a wealth of experience and expertise to the practice of child care.

My goal in writing this post is not to support one characterization over another, but to share the research I’ve done and the information that’s out there, so that everyone can make their own educated decisions on which classification best suits their unique situation rather than being frightened into a classification that isn’t right for them. If this helps parents and caregivers to make a more educated choice, then my job is done.

Note for Nanno Users: If you're worried that you may have paid a single babysitter booked through Nanno over $1,000 in a quarter or $2,200 in a year, you can find a list of all your bookings right on your bookings dashboard – but if you have any questions, feel free to ping us.

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About Liz Oertle
Denver, CO
Liz Oertle is the CEO and co-founder of Nanno. A recovering attorney and mother of two, she is passionate about helping parents connect with high quality childcare on demand.