Hiring a childcare provider, babysitter or nanny, to watch your children while at work during the summer may seem like a simple cash for service exchange. But, there are tax laws that may say otherwise; you may have a household employee on your hands which requires you to do some added work.
If you have household workers, whether they are a cook, housecleaner, or nanny and you pay them over $1,800 a year you are required to withhold Social Security and Medicare taxes and report their income on your Schedule H on your tax return. This also means that you will be responsible to pay in the employer share of the payroll taxes.
This is not required if you hire someone through an agency and make the payments to the agency directly. Not all agencies offer this option, usually you can go through an agency to hire the caregiver and they will help you negotiate the contract but that is where their assistance ends.
There are some tax breaks that are offered if you do hire a nanny. There are two tax credits that are allowed (if you qualify) for having dependent care expense. The first credit depends on your employer, if they offer a dependent care flexible savings account. You can use this pretax money to pay the nanny, which can save you up to $2,300 per year if you contribute the maximum to your account. If this is not an option for you, the alternative is the dependent care tax credit, worth up to $600 for one child and $1,200 for two or more children.
The IRS deems nannies as employees, no matter the agreement you may have with the caregiver. Be sure you are properly handling the tax treatment of your household employees, contact your tax professional today.