Paying for child care is one of the most daunting aspects of having a new baby.
It’s not just the cost, which is prohibitive, but also the complexities that come with it. Parents who use center or home-based care are fortunate in that making the payment for child care is fairly straightforward and made directly to the business or provider.
Not so for parents who have a nanny caring for their children. Paying a nanny can be such a big and complex responsibility that entire companies exist to do it for parents! But these nanny payroll services can be expensive. Many parents struggle with whether the cost is worth it.
Below we review the benefits and drawbacks of paying your nanny yourself or using a service. This will help you decide whether you want to handle your nanny’s pay yourself or offload it onto a service. If you do decide to handle it yourself, we provide tips for making the process as seamless as possible.
Handling your nanny’s pay yourself isn’t always easy, but it CAN be done. There is a learning curve that will a little support and know-how you can conquer. Don’t want that headache? Then a nanny payroll service might be right for you.
Handling payment yourself versus using a service
You’ve done it, you’ve hired your first nanny! You’re probably feeling proud, and you should be, at deftly managing the hiring process. It’s a big deal and a big accomplishment. Now it’s time to turn to how you will handle paying your nanny. This is just as big of a deal as hiring her!
The next big decision after you hire is to decide if you will handle the financial side of her employment yourself or if you want to offload that work to a professional service.
We’ll go ahead and assume you plan to employ your nanny “above the table.” By “above the table” we mean paying her as her employer rather than with cash. You really should. It provides stability and employment history for your nanny. It also means that you’ll be able to run for office someday…if you choose to do so.
The biggest benefit of hiring a professional service for paying your nanny is the time savings. Such a service will spare you all of the complexities and headaches you deal with if you do it yourself. Payroll, deductions, and yearly tax time, they’ve got it covered. It can be a huge, and I do mean huge, relief to not have to deal with these details for working parents with young children.
The drawback of a nanny payroll service? The price. Child care is expensive. And now you’ve added another cost on top of that. But most nanny payroll services won’t break the bank. The monthly charge ranges anywhere from $40 to $100 a month. The Savvy Nanny Payroll service, for example, is on the low end of that range. They charge $50 a month plus a $50 a year fee.
If you decide that a nanny payroll service isn’t right for you, know that many parents with a nanny decide to handle the finances themselves. Not only does it save money, but it also provides a level of control and insight into the financial side of being a household employer that hiring a service doesn’t. Below we cover some of the considerations you need to know about if you’ve decided to go it on your own with paying your nanny.
Taxes, Taxes, Taxes
Taxes are perhaps the most complex part of paying a nanny if you decide to handle it yourself.
There are several taxes that you’ll need to pay for your nanny. How you make those payments will depend on the state you live in. Because how you make your payments are different in each state, we won’t cover that information here. However, you will want to search for your state and nanny taxes to find out more about the specific ins and outs of where you live.
The first thing to know is that there are two broad types of taxes that you’ll be dealing with:
Taxes paid by the employer: That’s you! This includes Social Security, Medicare (also known as FICA), and federal and state unemployment.
Taxes withheld on behalf of the employee: This includes Social Security and Medicare, plus federal and possibly state taxes.
Whew, that’s a lot to handle! You may be thinking, “can’t I just treat my nanny as an independent contractor instead?” That question has been asked by many a parent over the years and the answer is a resounding NO. The IRS makes it clear that a household employee that is employed by someone who dictates when, what, and how the work is done cannot be an independent contractor.
So that’s a bummer. But, it doesn’t need to stop you from handling your nanny’s taxes yourself. Once you get started paying taxes you’ll be relieved that you’ve chosen to pay your nanny as an employer. Why? Because paying your nanny taxes correctly protects both you and your nanny. It means that once your nanny’s employment ends you can be assured that her time with you does not have any dangling legal complications. It also protects her by giving her basic assurances, like employment that will contribute to her future social security support.
Want to learn more about nanny taxes? Read on for more detailed information about this important topic. It includes information about specific types of taxes and how to get started with withholding.
Payment Software
If you hire a service to handle your nanny taxes, they will likely also offer a service to handle all of your nanny’s paychecks.
For busy parents of young kids, this can be a godsend! You’ll likely save a good deal of time if you pay someone to handle all of the ins and outs of managing your nanny’s regular paychecks.
Why might you not want to use a service to handle your nanny’s paychecks? There are a couple of reasons. First, you have less control over how and when your nanny is paid. This can cause some headaches if their hours fluctuate. It can also be a challenge if you want to modify the day and frequency of her payment.
Parents who decide they do want to handle their nanny’s paychecks have a lot of options available to them to make the process a whole lot easier. There are several software solutions available to make payment quick and easy. Here is a rundown of the most popular ones.
Intuit’s Quickbooks payroll software is an industry leader in providing an easy-to-use and well-supported software platform. Concerned that your payroll software might not be around a year or two? That may be an issue with a more newly-developed software, but not with Quickbooks. Quickbooks is well-established, easy-to-use, and affordable.
SurePayroll is part of the larger Paychex business, which offers a suite of HR and payroll services. SurePayroll provides a nice balance of an easy-to-use interface at an affordable price. Like the other payroll software services, they provide direct deposit capabilities to make handling payroll quick and easy.
Square Payroll is part of the larger Square payment systems used by many businesses, particularly small service-based ones. Square isn’t just for retail. It’s also great for other small businesses and household employers as well. You’ll find the reporting in Square to be superb. With that, plus features like direct deposit, Square is a great option for families looking to pay a nanny.
Payment Schedule
Once you’ve decided on payroll software you’ll want to figure out how often you’ll be paying your nanny.
How you’re paying her, by a salary or by the hour, will influence the frequency with which you pay.
Paying a salary: If you’re paying your nanny a salary, a monthly or bi-monthly pay schedule with likely be a good fit for you. A monthly payment schedule means that you’ll have to handle payroll less often. However, a monthly schedule may be challenging for your nanny’s budgeting. A bi-monthly payment schedule, for example on the 15 and 30 of every month, gives you consistency in when you pay. You can take the yearly salary of your nanny and divide it by 24 pay periods to determine the number of her paychecks.
You may be wondering why not an every-other-week schedule? An every-other-week schedule can create some long-term complications in terms of payroll. There are occasional years where this means your nanny will get 27 paychecks. If she is paid hourly that’s not a big deal. If she is paid a salary, it can be a bigger headache. That’s why smaller organizations are more likely to pay on a bi-monthly schedule.
Paying by the hour: If you’re paying by the hour, an every-other-week pay schedule may be a good fit. This allows your nanny to submit her hours over pay periods that are a consistent number of days. This should provide some consistency in the amount of her paychecks. It also means you do not have to handle payroll every week.
Benefits Packages
One final component of your nanny’s overall pay package to consider are any benefits you’d like to offer. While benefits aren’t part of a nanny’s pay exactly, they do contribute to her overall compensation. Many household employers do not provide benefits. However, if you are looking to keep your nanny for a long period, extra benefits will provide her with an incentive to stay.
Paid time off: Decide how much time you’re willing to offer for paid sick or vacation leave. Many families provide this as a bank of hours to cover both. This is also known as PTO, or Paid Time Off. Negotiate with your nanny to see if you can coordinate your separate vacations so that you are not without care for the periods she is on vacation. At the beginning of each year, work with her to develop a schedule of vacations and a list of paid holidays that she will have off.
Health insurance stipend: Individual families are not in a situation where they can directly provide health care insurance. However, some families will provide a monthly stipend to their nanny to help her with her health costs. Usually, this would be a flat amount but you could also structure it to be a percentage of the cost to the nanny.
Retirement stipend: Similar to health insurance, families that want to support their nanny’s retirement may consider providing a monthly or yearly stipend, or making a direct deposit, to an Individual Retirement Account (IRA). A retirement benefit provides the kind of stability that helps a nanny make her job into a career.
Mileage reimbursement: A big benefit of having a nanny is that she can drive your children to activities during the day. But driving comes at a cost in terms of gas and wear and tear on the car. You may consider reimbursing your nanny for the costs incurred from driving her personal vehicle. Most payment software services should be able to handle mileage reimbursement. Many employers use the mileage reimbursement rate suggested by the IRS. This rate was 62.5 cents per mile in 2022.