How to Avoid The Nanny Tax with Bubbles by Swing Education

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Bubbles by Swing Education

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Finding a private teacher is exciting! Your kids are set up for some quality at-home learning and you now have time to get work done without the kids needing attention every few minutes. With the kids engaged and some time to yourself, it might seem like you have everything under control. However, one aspect that is easily overlooked when hiring a private teacher is your payment method. It is common to reach a one-to-one agreement with the teacher on rate expectations, but it is important to ensure that you are following federal and state tax laws. There are serious consequences with the IRS if you are not well informed about how to properly pay your private teacher. Here are some guidelines on what to know and how to stay compliant.

What is the nanny tax?

The nanny tax is a federal tax paid by families for household employees such as a nanny, housekeeper, senior caregiver, and private teacher for your learning pod. As of 2020, if you pay your household employee $2,200 or more per year, you must pay both payroll taxes and employment taxes.

What qualifies as a household employee? 

The hired worker is considered a household employee according to the IRS if:

  • You control what and how the work is done.

  • The individual is not your spouse, your parent, a child under the age of 21, or a minor under the age of 18.

If a company provides the service to hire a private teacher and controls what and how the work is done, the worker is not considered your employee.

The upsides of paying the nanny tax:
  • More likely to employ a higher-quality private teacher because it shows he or she has job security and is a valued professional.

  • Tax savings through your employer’s FSA. The IRS has more information about Child and Dependent Care expenses and credits.

  • Access to unemployment benefits for the private teacher should you need to let them go.

  • Compliance with tax and employment laws.

The downsides of not paying the nanny tax:
  • No access to government benefits such as worker’s compensation, disability benefits, unemployment insurance, Medicare, and Social Security for your private teacher.

  • No official record of employment for your private teacher, who then may be ineligible for certain loans, rental opportunities, and utility applications.

  • Liability for both the employer and employee portions of FICA.

  • Back taxes, which include penalties and interest upwards of $25,000.

  • Felony charges for tax evasion.

  • Potential for a lawsuit from your private teacher for lost wages or medical costs if hurt on the job.

  1. File to become an employer and apply for an employer identification number (EIN). Your EIN is used for dealing with the IRS and other agencies.

  2. Ask for 3 things from your private teacher prior to the start date.

    1. Social security number or an ITIN.

    2. A completed Form I-9 with proper identification.

    3. A completed federal W-4 form and corresponding state income tax withholding form (if you live in a state with income taxes).

  3. Calculate and keep track of your private teacher’s payroll and hours. Care.com has a handy calculator for managing payroll taxes.

  4. File tax returns on a quarterly basis.

  5. Complete year-end tax forms.

The IRS estimates that you can expect to spend about 60 hours a year handling your nanny taxes. So, if you want to skip the hassle of the tax and payroll process for your private teacher, check out Bubbles by Swing Education. Bubbles makes it easy for parents by vetting, screening, hiring, and managing payroll for your private pod teacher! Go here, to learn more about Bubbles.

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