4 Nanny Pitfalls to Avoid
When I found out I was pregnant with twins last spring, I started seeing double. Yes, twice the baby smiles, and twice the tiny baby booties, but also twice the midnight feedings – and twice the childcare costs. After crunching the numbers, it became apparent that our most cost-effective (and sanity saving) childcare choice would be to have in-home care. We put an ad out for a nanny, found someone wonderful and trustworthy and within our budget, and I was set to return to work knowing the babies were in capable hands. I also learned some useful facts about the legalities of hiring a nanny, including 4 nanny pitfalls you will want to avoid. Here for you is the fruit of my labor (which is also how I introduce my children to strangers).
Treating the Nanny as an Independent Contractor
Despite popular misconception, nannies (along with gardeners, housekeepers, drivers and pretty much all your favorite characters from Downton Abbey) are household employees, not independent contractors. As such, they are treated much differently than the teenaged neighbor you pay cash for babysitting a few hours on Friday night. Your nanny is entitled to all the protections for employees under state and federal law. This means that besides finding the right person for the job, you also need to keep in mind your own responsibilities for providing worker’s compensation coverage, payment of minimum wage and overtime pay, and complying with a myriad of tax obligations. Familiarizing yourself with these requirements ahead of time can save you from facing penalties and incurring liabilities that can come with misclassification.
Paying them “Under the Table”
Because the nanny is your employee, you must follow applicable employment laws regarding their compensation. These include payment of the federal and local minimum hourly wage, with withholdings for social security, medicare, and in some cases income taxes. You are also responsible for payment of the employer portion of these taxes, and for filing state and federal tax forms on a timely basis. Nannies are considered non-exempt employees, meaning that they are entitled to overtime pay for hours worked beyond 40 in a seven-day week. Keep this in mind when asking the nanny to stay late so you can finish writing that article for your firm’s newsletter...
While calculating taxes and withholding may seem like a daunting task, failing to do so puts you on the wrong side of the law, and could lead to hefty fines or even criminal prosecution. Further, paying these taxes ensures that the person caring for your children will have future access to government benefits such as unemployment insurance and social security payments.
Failing to Have Adequate Insurance
First time parents will be familiar with the internal litany of “what-ifs” that accompany bringing your bundle of joy home from the hospital. What if they get sick? What if they never stop crying? What if someday one of them gets invited to a birthday party and the other one doesn’t and her feelings get hurt? (Is this last one just me?) And while the answers to these what-ifs aren’t always cut and dried (take them to the doctor, invest in some noise-cancelling headphones, ban attendance at all birthday parties and tell them every day how smart and fun and funny and special they are), one tool for combatting the what-ifs is readily available – insurance. Many states, including Minnesota, require that employers carry worker’s compensation insurance for their employees. While you are not obligated to contribute to the nanny’s health insurance costs, the nanny may look to you for help covering healthcare costs for injuries sustained while on the job. Investing in a worker’s compensation policy upfront means that if the nanny gets rear-ended while driving the kids to soccer, or slips on a puddle when your toddler decides that diapers are optional, you won’t be on the hook for those medical bills and lost wages. A final word to the wise - your homeowner’s insurance is not sufficient protection if you are going to have in-home care. In fact, many homeowners’ policies specifically exclude claims for household employees. To fully comply with the law, and to ensure that these “what-ifs” are covered, you will need to obtain worker’s compensation insurance.
Not Utilizing Your Dependent Care FSA or Dependent Care Tax Credit
Faced with minimum wage and overtime requirements, insurance premiums and employer taxes, you may be thinking that it is not actually in your best economic interest to hire a nanny after all. Take heart, this fourth point offers a way to recoup some of those costs. If your employer offers a Dependent Care FSA, you can deposit pre-tax dollars into an account for payment of childcare expenses. This means that you could potentially set aside up to $5,000 pre-tax dollars, which you can draw upon to pay expenses related to the care of your children. Alternatively, the Dependent Care Tax Credit allows you to take a credit of up to $3,000 (for one child) or $6,000 (for two or more children), for qualifying child care expenses. Unfortunately, the IRS does not allow double dipping, so you will have to weigh the pros and cons of both the Dependent Care FSA and Tax Credit to determine where the most savings lie. In any event, to take advantage of either of these benefits, you need to be able to demonstrate that you are paying your nanny in compliance with the law.