As those with children at home are well aware, the COVID pandemic greatly changed childcare in 2020, and those effects are still being felt as we move into 2021. Many schools are still not meeting in person, daycare centers are either closed or their services are interrupted, and generally speaking, most families’ “normal” childcare setup does not resemble what it looked pre-COVID-19. Not only do many families have to watch their children now that they are home, but they are expected to guide them through their school curriculum and still perform at their day job remotely.
Some families that pay for childcare saved quite a bit of money during the initial pandemic shutdown in early 2020 since they no longer had to pay the recurring childcare bill. However, as more families are back to work in 2021, childcare costs are again part of the monthly budget. I frequently have conversations with my “young family” clients that are expecting a baby. They commonly ask about the costs of childcare and want to plan for the increased monthly expenses. Unless your family is in the fortunate situation of having one spouse stay-at-home or have extended family in the area to help care for your children, you are probably going to have to pay childcare costs. A lot. “A lot” as in nearly the amount of a second mortgage in many cases. I’ve mentioned how expensive it is to raise children in a past blog post.
Instead of focusing on the fact that childcare is expensive, let’s focus on strategies to help reduce some costs, have more flexibility, and (potentially) be an alternative childcare option for those that are worried about how daycare centers etc. are handling their COVID-19 procedures and the exposure to more children. Additionally, we will outline how to go about hiring a nanny and some considerations that come along with that decision. Remember, I’m not an epidemiologist, doctor, public health figure, or the like. Rather, I’m your friendly neighborhood financial advisor that has simply received input from clients informing me that they like the idea of hiring an in-home nanny for multiple reasons: one of which is more control of who their child is coming in contact with in this COVID era (and even post-COVID era now that there is some light at the end of the tunnel with vaccines being rolled out).
If my family decides to hire a nanny, where do I begin?
First and foremost you will need to find someone that has demonstrated caretaking qualities, is trustworthy, and aligns with your family’s values. You should interview several candidates. You can find candidates through Care.com, local “Mom” groups, or by simply asking others in a similar life stage that are already in your network. If you are going to do a “nanny share” – where you and another family (or two) collectively find a nanny to watch your children as well as the other family’s children – ideally, you find a family that you get along with and have similar or complementary schedules. Joining a nanny share can considerably cut your costs, especially if you have additional children. For example, if you have one child and are paying $300/week for that child to go to daycare, your second child could very well double your weekly payment to $600/week for both children! With a nanny share, it is expected that you should give your nanny a pay increase when you have additional children, but it isn’t expected to double their pay.
OK, we found a trustworthy nanny, now what?
I would recommend “doing it by the book”, and formally establishing an entity to pay your nanny. This means legally paying your nanny. To be more clear, this means NOT paying them cash under the table! I believe that there is a social obligation to your nanny when you hire them. Some of these responsibilities include withholding taxes for them and paying into unemployment. By formally reporting wages for your employee and paying into Social Security, you provide earnings history (in case they apply for a loan, for example) as well as help them earn Social Security credits. In the situation where you need to lay off or furlough your nanny, paying into the Unemployment Insurance program will allow them to collect unemployment benefits. During Safer-at-Home orders in early 2020, many families furloughed nannies. Assuming they are eligible, your nanny can receive some sort of income through the state unemployment program during their furlough.
You are considered a Household Employer and your nanny is considered a Household Employee. Many simply establish a sole proprietorship in their name. This is the easiest route but could potentially expose you to more liability (vs. establishing an LLC, for example. You may want to discuss this with an attorney, as I cannot give legal advice). You will have to register for an Employer Identification Number (EIN) online through the IRS. One thing that is overlooked is for the Household Employer to have their nanny complete an I-9 form to show that their employee is authorized to work in the United States.
I have my EIN, how do I handle taxes and unemployment insurance?
You will have to register your Household Employer through the state. If you pay your nanny more than $2,300 in gross wages to your nanny in 2021 (or $1,000 in any calendar quarter), you are required to withhold and pay Social Security, Medicare, and Unemployment Insurance taxes (see the IRS Household Employer Tax Guide). In Wisconsin, there are a couple of steps to do this. For Unemployment Insurance, you register through the Department of Workforce Development (DWD). You will also need to complete your Business Tax Registration through the Department of Revenue. One common misconception is that your nanny is a 1099 employee; this is not true! Your nanny is a W-2 employee. You should have them complete a W-4 form upon their hire (and associated state form, like Wisconsin’s WT-4) for withholding.
When it comes to paying taxes, you will have to submit your nanny’s wages on a quarterly basis in Wisconsin. However, as a Household Employer, if your tax liability is low enough as determined by the Department of Revenue, they may change your filing requirement to annually. The Department of Revenue will send you a letter if this is the case. A common mistake is to submit your quarterly Unemployment Insurance payment to the Department of Workforce Development and neglect to submit your quarterly payment to the Department of Revenue, or vice versa. You need to complete both of these items every quarter (or every year, if you have an annual filing requirement). If you are a sole proprietor, you account for your nanny’s federal income taxes withheld taxes when you file your annual tax return, via Schedule H. A good habit is to automatically put your nanny’s withheld amounts in a savings account, knowing that you will have to submit those taxes at some point. You could also withhold an additional amount from your personal wages to help account for any extra taxes that might be due when you file your tax return.
Now that I’m an employer, what risks are involved?
Being an employer with an employee exposes you to some risks. You should definitely consider a Workers Compensation Policy to protect you and your family in the case of your nanny getting injured or ill while on the job. Become familiar with the laws in your state, as some states require Household Employers to procure a Workers Compensation Policy. The State of Wisconsin does not require you to have a Workers Compensation Policy.
How do I pay my nanny?
The mode of payment isn’t necessarily as important as tracking your nanny’s gross wages, taxes withheld (federal, state, Medicare, Social Security, etc.). For example, paying them by physical check or even Venmo is fine. I would highly recommend using a software such as NannyPay or HomePay. This will make it much easier for you to track and report quarterly wages to the state, generate a year-end W-2 for your nanny, or provide them with pay stubs. If you use a desktop version of payroll software (that’s correct, there are still desktop software options in 2021. Not everything is in the cloud!), be sure to back up your files frequently on an external hard drive. It would be a huge hassle to re-create your nanny’s wages and withheld amounts if your computer crashes.
What else should I be on the lookout for?
Review options through your employer’s benefits package that might give you a tax break. I’m specifically thinking of a Dependent Care FSA. Most families that hire a nanny will pay their nanny more than $5,000 (the maximum a married filing jointly couple can contribute to a Dependent Care FSA in 2021) in a given year, you might as well take full advantage of using an FSA so you can pay a portion of child care expenses income tax free. Work with your accountant (or Walkner Condon Tax Services) to see what other tax breaks might be available to you, such as the Child or Dependent Care Tax Credit.
Have I talked any of you out of hiring a nanny? Seems like a lot of work, doesn’t it? It can be more work and more responsibility; however, speaking from experience, I think it is actually quite manageable. I know that my family (and some of my clients) have saved money by going the nanny or nanny share route. If this is something that you would like to learn more about, please reach out to me! I can give you my perspective as a financial advisor as well as my personal perspective since my family has decided to choose a nanny share setup over daycare.
Mitch DeWitt, CFP®, MBA