Anyone have experience with in-home childcare?

[Ladybug122]

DH and I have been thinking about trying for #2 next year. With this thought comes the inevitable question of childcare. The situation I have now (3 days at a sitter's house, 2 days at a daycare center) is not something I plan on doing with 2 kids for various reasons (the prohbitive cost of 2 kids at the ridiculously expensive daycare at my job and the fact that my sitter does not want to babysit anymore next year...or so she says...that's another story). Anyway, I think that all things considered, I would like to have someone come to my house next time around.
Right now I pay my sitter a lower rate "under the table" per her request, but I don't know if this will be the case in the future. So, my question is, when you plan on "claiming" child care on your tax return, are you required to take taxes out of your sitter's pay, or is it their responsibility to pay their taxes at at the end of the year? Full-time in-home childcare is not cheap, so I at least want to be able to claim it on our taxes.

[GrayMatterWife]

Re: Anyone have experience with in-home childcare?

DH and I have been thinking about trying for #2 next year. With this thought comes the inevitable question of childcare. The situation I have now (3 days at a sitter's house, 2 days at a daycare center) is not something I plan on doing with 2 kids for various reasons (the prohbitive cost of 2 kids at the ridiculously expensive daycare at my job and the fact that my sitter does not want to babysit anymore next year...or so she says...that's another story). Anyway, I think that all things considered, I would like to have someone come to my house next time around.
Right now I pay my sitter a lower rate "under the table" per her request, but I don't know if this will be the case in the future. So, my question is, when you plan on "claiming" child care on your tax return, are you required to take taxes out of your sitter's pay, or is it their responsibility to pay their taxes at at the end of the year? Full-time in-home childcare is not cheap, so I at least want to be able to claim it on our taxes.

THere are several books out there that will address this exact issue and several reputable websites. Plus, most websites that offer nanny-placement services will have a page devoted to understanding your federal tax obligations when having a nanny who works in your home.

There is a specific dollar amount prescribed by the IRS to be considered "nominal" (I thought it is around $1000, but PLEASE DON'T QUOTE ME! I could be WAY off). If you plan to pay more than that in a calendar year (which you will), you will need to do federal withholding for your sitter, to stay on the up-and-up with the IRS. I am sure that there are thousands upon thousands of in-home sitters who are paid under the table. However: (1) if they get busted by the IRS, you get busted and could end up owing fines; (2) you cannot deduct for childcare expenses because you can't "have it both ways"--that is, you can't, on one hand, act as though you do not have a nanny because you don't comply with the Internal Revenue Code's withholding requirements, but on the other hand expect the government to recognize a tax advantage for you (for care you have no record of paying for); and (3) if you or your husband ever want to run for office or be appointed to a high-level position in the government, failure to pay "the nanny tax" could REALLY come back to bite you (remember Zoe Baird? A Clinton nominee for a cabinet position...oooops...).

You have to do withholding because the nanny is considered your "employee" for purposes of the IRS. She works in your home, under your direction, etc. The other option is to consider an out-of-house nanny. An argument can be made that a nanny who works out of her home is an independent contractor, not your employee. You do not have to do withholding for an independent contractor.

Just some thoughts, for whatever they're worth, which may not be much...

[Flynn]

Re: Anyone have experience with in-home childcare?

I don't know the details but had several friends who nanny-shared in Seattle. One week was at one house, the next was at the other house. It seemed to work well assuming all parties were on the same page.

[HouseofWool]

Re: Anyone have experience with in-home childcare?

If you are paying your sitter under the table, then you cannot use a pre-tax dependent care account or claim the expenses on your taxes. Your sitter is, in all likelihood, not claiming her income from you on her taxes either. If she claims the income for tax purposes, then you get to claim it as well. Paying the income taxes is her responsibility, not yours.

I have no idea how it works if you are paying for a nanny... I've never had to do withholding for an employee before.

[locumtenenswife]

Re: Anyone have experience with in-home childcare?

I used to work with a national payroll service provider, and the IRS has strict guidelines for paying household employees (including in-home childcare). The IRS will consider you a "Household Employer". You can check out "Publication 926" on the irs website at http://www.irs.gov for more info on the tax implications of being a household employer.

The legal way to pay an employee for in-home childcare is to deduct the employees wages for social security, medicare, federal and state income tax and any state and local taxes that apply for domestic help (every state is different). The person providing the childcare would be considered your household employee, and you would have to provide them with a paystub showing the tax deductions and provide them with a W-2 at the end of the year. You are required by the IRS as a household employer to file a W-3 at the end of the year and provide estimated payroll tax payments to the IRS (and state, if applicable) each quarter, which includes deductions from the employees payroll checks and additional taxes that you're responsible for as an employer (You match social security, match medicare, and there also may be state and local taxes that apply).

If you don't want to deal with the headache, the only legal way to do it would be to hire a CPA firm or payroll company to take care of the payroll for you and handle all the filing responsibilities with the IRS and State. If I were in your situation, I wouldn't risk paying cash under the table as the penalties if you're caught are outrageous, and you (not your employee) are held liable for any payroll taxes unpaid.