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Nanny Taxes
Keeping Clean with the IRS
By Joe Cooke, J.D., C.P.A.
State and Local Taxes
Besides all the federal taxes, your nanny could subject you to state unemployment taxes, workers' compensation and other state and local taxes. Check with all the local taxing jurisdictions or your tax accountant to make sure you have covered all the bases. IRS Publication 296, Household Employer's Tax Guide, includes an appendix of the major state revenue agencies. Here is the final review: SS-4, I-9, W-4, W-5, FICA, FUTA, W-2, W-3, Schedule H (1040). Sound too intimidating? There are other options.
Alternatives to Household Employees
There are two basic categories of workers for income tax purposes: employees and independent contractors. Basically, if you set the work standards, your nanny is an employee. However, if the nanny controls how the work is done, he or she may be considered a self-employed independent contractor. 
Nannies that provide childcare services in their own homes may qualify as independent contractors. Also, if you obtain your nanny through an agency that supervises and pays the nanny on your behalf, you may not have to worry about tax reports and withholding. However, if you hire your nanny through an agency or from a list provided by an agency or association, but you control the work, your nanny is your employee.
Disclaimer
This is only a brief summary of the tax laws. If you are at all unsure about all this paperwork, find a good accountant with payroll experience. Be sure to ask enough questions about household employment taxes to determine that the professional you choose is competent and informed.
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