Part 3: How to Hire a Nanny

Ooh, tax stuff. It's not sexy, but it's the most important. We'll start with the Federal taxes, as believe it or not, it's the easiest!

• Social Security and Medicare are paid for in two parts - typically half by the employer and half by the employee. You can pay your employee's portion if you'd like. For these purposes, let's assume you're not. Withhold 6.2% of your employees paycheck for Social Security and 1.45% for Medicare (please check the IRS for the latest, as due to the recent economic conditions, the Social Security withholding is slightly less, but I'll use the traditional percentages here). Out of your own pocket, pay 6.2% of your employees wages to Social Security and 1.45% for Medicare. Here's an example using real, simple numbers...If you pay your nanny $100 a week, you'd withhold $6.20 for Social Security and $1.45 for Medicare. You'd pay out of your pocket an additional $6.20 for Social Security and $1.45 for Medicare (this is why the "cost" of a nanny is slightly more than her actual wage...you need to pay some additional money out of your pocket). This money ($15.30) goes to the government. Check out this document for a more clear description of the options.
• FUTA is the Federal Unemployment Tax. You only pay this tax (out of your own pocket) on the first $7,000 in wages. The rate is .08%, but ONLY if you pay your state unemployment taxes on time. So if you pay your state unemployment taxes, you'll only owe about $50-60 to the feds.

And then there is withholding. As household employers, you don't need to withhold taxes, but it probably makes sense. You obviously have to follow your employees wishes. Ask your employee to fill out a W-4. Based on the exemptions, withhold the appropriate amount from the paycheck (find out much to withhold in this document).
And how do you get all this money to the government? It's actually easy. You can pay all at once at the end of the year (and speaking of the end of the year, you'll need to provide your nanny with a W-2 and send the government at W-3 at the end of the year) or paying estimated taxes quarterly. Or you can have the money taken out of YOUR paycheck. For instance, let's say the taxes that you owe for your nanny plus your nanny's withholding is $50 per week. There is a line on the W-4 that says "any additional amount you'd like withheld." You just put $50 in that line. So basically, the money that you owe for your nanny is paid through money taken from YOUR paycheck...sounds complicated, but it's actually easy...and the money gets exactly where it needs to go. It's also easier to budget, as then you're technically "paying" those taxes on a weekly basis instead of one lump sum at the end of the year or in estimated quarterly payments.
As always, I'm not a tax expert...so take everything I say with a grain of salt. This is just to make you feel informed...I'd suggest running everything by an accountant regardless, but if you've read these posts, at least it will be a shorter visit with the accountant!
Next up...state taxes. Then it's all done!