Do I Really Need to Pay Nanny Taxes?

To the dismay of many parents, yes.

The IRS divides workers into two categories — employees and independent contractors. In nearly all cases, nannies are classified as employees.

Why?  The IRS looks beyond labels to determine a worker’s classification. In general, if an employer has the right to control or direct the work performed — and how it is performed — the worker is an employee. Parents typically exercise a fair amount of control over nannies — they assign job duties, say when and where to work, etc.  Thus, nannies are classified as employees and not as independent contractors.

That said, don’t be discouraged.  Grumble, then hire a good accountant or nanny tax company to do the heavy lifting of figuring out payroll and taxes.  And know that proper tax reporting has its benefits — you’ll be able to use tax credits to offset the extra costs, and your nanny will be able to seek unemployment and Social Security, if needed.