Nanny Taxes

[rwturner]

"A taxpayer can get a deduction of up to 35 percent on expenses for a nanny, capped at $3,000 for one child or $6,000 for two or more children."

Are employer payroll taxes part of the $6,000 cap, or are they a separate deduction? 

Ie:

(Nanny pay + employer payroll taxes)*35% capped at $6,000 

-OR-

Nanny pay * 35% capped at $6,000

Employer payroll taxes treated as their own deduction

[Opus 17]

You are talking about the child and dependent care credit.  You can claim a credit (not a deduction) on up to $3000 of care costs for one child or $6000 of care costs for 2 or more children, if you pay for care so that you (and your spouse if married) can work or go to school full time.   The credit is between 20% and 35% of the eligible cost of care, depending on your income.

When you hire a nanny, you are responsible for household employees tax.  That's about 15% of their gross wages.  Here is the correct way to do this.  Suppose the wage is $100.  You would deduct $6.20 for social security and $1.45 for Medicare, and actually pay the nanny $92.35.   At the end of the year, you would give the nanny a W-2 showing $100 of wages and $6.20 and $1.45 of medicare withholding.  On your tax return, you would pay household employee tax of $15.30 (half is the amount you withheld and half is your match) based on the $100 of gross wages.

[Edited]

Now going back to the child and dependent care credit, the amount of "expense" you can claim for the credit is the gross wages you paid plus your share of the household employee tax, or $107.65.

[rwturner]

Yes sorry I said deduction and should have said credit.

Does anything special happen with the $7.65 of payroll tax that was my responsibility? Is that eligible for any deduction if I am itemizing deductions? 

[Opus 17]

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@rwturner wrote:

Yes sorry I said deduction and should have said credit.

Does anything special happen with the $7.65 of payroll tax that was my responsibility? Is that eligible for any deduction if I am itemizing deductions? 

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No, that tax is not deductible.

[Critter-3]

On the 2441 you DO add the employer portion of the FICA taxes to the amount paid for child care as reported on the Sch H ... so for every $100 you pay you get to use $107.65 on the day care credit. 

[Opus 17]

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@Critter-3 wrote:

On the 2441 you DO add the employer portion of the FICA taxes to the amount paid for child care as reported on the Sch H ... so for every $100 you pay you get to use $107.65 on the day care credit. 

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Yes, I was wrong about that and have corrected it above.

However, remember that the maximum qualifying nanny expense for the credit is either $3000 or $6000.  If you pay your nanny more than that, there are no tax breaks or deductions for the nanny tax.  You must figure that your actual cost will be 7.65% higher than the gross wage you offer to the nanny.