“My nanny needs to take home $10 per hour.”
We hear this statement, or similar statements, every day. A household employer finds a nanny who is a great fit, they are ready to make an offer, and the nanny indicates she wants to take home a certain amount. Easy, right? Not so fast. Agreeing to pay an employee a net (after taxes), rather than a gross (before taxes) can create administrative headaches, financial frustrations for the employer and/or employee, and tax filing difficulties.
Payroll is processed and reported to local, state, and federal tax agencies on a gross basis (before taxes). In a typical payroll arrangement, an employee agrees to receive a gross wage. The employee knows that required taxes like Social Security, Medicare, and local taxes will be withheld from the gross pay along with potential income taxes. New employees fill out a W-4 (and a state version of the W-4 when applicable) so that their employee income tax withholdings can be calculated. Income taxes are generally calculated on a table and the amounts are based on the individual worker’s circumstances (Are they single or married? How many allowances do they have?). A properly filled out W-4 (and state form) will approximately cover the employee’s income tax liabilities (i.e. they won’t owe a significant amount at the end of the year due to their employment earnings and they won’t receive a large refund at the end of the year due to their employment earnings).
In an arrangement where the employee is receiving a gross pay, the employee is responsible if their taxes are under or over-withheld based on how they filled out their employee paperwork. If the employee owes taxes or receives a refund, it is not the employer’s concern as all withholdings were based on the employee’s withholding status.
In an arrangement where the employer agrees to pay the employee a net wage, the employer not only takes on the employee’s tax liabilities meaning greater cost (in addition to their employer liabilities), but they also become exposed to over or under-paying the employee’s income taxes. Few employers want to pay for their employee to receive a large tax refund at the end of the year and even fewer employers want the difficult conversation of their nanny owing taxes at the end of the year and blaming the employer for not paying enough.
NannyChex recommends that employers offer a gross wage to their household employees. This method is the cleanest to follow, is the most consistent for wage reporting and tax filing, and ensures that the employee’s taxes are based on their own circumstances and withholdings with the employer not being exposed to over or under-paying the employee’s income taxes.
If an employee states that they need to take home a certain amount, you can utilize the free NannyChex pay check calculator (available at https://www.nannychex.com/index.cfm/ID/42/PaycheckCalculator/ ) to determine a gross pay based on the net your nanny wants to receive and move forward with that gross rate. NannyChex team members are available to help employers determine an appropriate rate based on their individual budget and desire not to over-pay or under-pay their employee’s taxes while still achieving a net pay where the employee is comfortable. Please give us a call today at 877-626-6924 for a free consultation, and we can discuss your options and provide you with different earnings scenarios before you finalize hiring your nanny.