Hiring a nanny in Washington state

Hiring a nanny and paying above board is painful and it shouldn’t be! It is no wonder so many families just toss their arms up and pay under the table or feel they must hire someone to do this. I found the fees for hiring someone to pay our nanny cost prohibitive. If I can figure that out, more of my childcare budget can go to the nanny. There is some initial work the first few weeks, but after that with a simple spreadsheet it is repetitive and something anyone can do.

There are some great blogs out there of other parents who were frustrated with the mountains of information. They were able to figure it out and I am just stubborn enough that I will also figure it out.

• Dave Naffziger's Blog: Nanny Taxes -- Hiring a nanny in Washington State
• Pixel Theory: nanny tax how-to

The part that appears intimidating is just the sheer volume of information and weeding through that to find what you need to do for one employee. The DOR website and the IRS sites have lots of information for large companies who hire tons of people. I’m hiring one to work in my home, not a business.

For Federal taxes if you hire no more than three people to work in or around your home, you can pay the household employment taxes on your 2016 federal tax return. The IRS has a well written document on hiring a household employee: Publication 926 for 2016. This walks you through most of your questions regarding the federal requirements and reminds you if there can be state requirements. We are in Washington State. There are likely some similarities in other states, but the federal requirements will be the same for everyone.

The initial set-up is in the following steps:

1. Obtain an EIN through the IRS. (Federal requirement). Do not lose this number even if you no longer have a nanny! We hired a nanny in 2008 and my EIN is the same. They will not send you a duplicate of this information.
2. Apply for a UBI in WA state. (Business License Application).  For 2016 this is a $19 fee. (state requirement)
3. Ask your nanny to fill out an I-9 form. (Federal requirement). Keep this in your records.
4. Ask your nanny if she or he would like you to withhold taxes. (FICA). Per the 926 publication you should withhold federal income taxes (FICA) if your nanny wants you to. (You will still need to pay FUTA, SST and Medicare taxes).
   

   You aren't required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4. (pub 926, page 8)

5. Report your new hire to WA state DSHS. You must have your federal EIN for this in order to report online. This also must happen within 20 days of the hire. 

Payroll basics

Now that you are set-up as an employer, you need to set-up your payroll for your employee. My nanny asked for a weekly paycheck. Do what works the best for your family and your nanny. I picked Thursday as a pay day so I had some time to get it done. I think this is more pertinent the first few weeks. We have a notebook where our nanny logs in and out. We tried an app, but she had to do a screen capture to send it. This works for our family.

I have a spread sheet to calculate the hours for the week based on the time card. IF your nanny opts to have his or her federal taxes withheld, this is a tiered calculation based on the pay cycle. Skim Publication 15. You can calculate the withholdings based on the percentage method or using the wage bracket method look-up tables.

I opted to use the percentage method, which meant I reference the “Percentage Method Tables for Income Tax Withholding.” Since we are paying weekly, I used the WEEKLY payroll period and built a big function based on Table 1, WEEKLY Payroll Period, into my spreadsheet. The other method would be to use the look-up-tables “Wage Bracket Method Tables for Income Tax Withholding.”

What taxes are paid and what shows up on the paycheck:

Social Security Tax (SST)	6.2 % of gross pay	Employee and employer
Medicare	1.45 % of gross pay	Employee and employer
Federal Unemployment Tax (FUTA)	6.0 % of gross pay (There can be some variation here)	Employer
Federal Income Tax (FICA)	See publication 15 for specifics, example FOR Single Person, weekly payroll percentage method OVER But not over Excess over $43 $222 $0.00 + 10% $43 $222 $767 $17.90 + 15% $222 $767 $1796 $99.65 + 25% $767	Employee

What does that table mean in FICA row? If, for example, our nanny earned $500 last week, the FICA tax withheld from her pay would be calculated as:

FICA = $17.90 + ($500-$222)*0.15

FICA = $17.90 +$41.70

FICA = $59.60

If I used the look-up table method and assumed 0 withholdings on the nanny’s W-4, the FICA would be $60.

There are a few other things that apply to us simply because it is so late in the year. Some of the income limitations could work in the nanny’s favor. SST and Medicare taxes are only paid if the employee earns more than $2000 in a year. Being that there are only a few weeks left in the year, our nanny will not need to pay this.

The FUTA tax is paid if the employee has earned more than $1000.  We have hit that one.

FICA is withheld on all income if the nanny (employee) indicates that they would like you to do so.

There you have it!