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Can an employer pay the nanny on the payroll of their own business?

Considering adding a nanny on business payroll? Nanny employers who own a business or a farm operated for profit can choose to include their nanny’s payroll in their 941 or 943 tax returns. The ‘nanny taxes’ are exactly the same employment taxes paid for other employees and do not require special calculation.

What the sole proprietor may not do is include the nanny’s payroll and associated payroll taxes in their business tax deductions. A nanny provides childcare and is a contributing member of a household, not the employer’s business.

The IRS specifically cautions you in Publication 926: “The deduction that can be taken on Schedules C and F (Form 1040) for wages and employment taxes applies only to wages and taxes paid for business and farm employees. You can’t deduct the wages and employment taxes paid for your household employees on your Schedule C or F.”

Sole Proprietors who do not wish to co-mingle their household and business payroll may choose to report the nanny wages on Form 1040 Schedule H and would then remit the W-2 form at year end with a separate W-3 cover form. From a bookkeeping and audit standpoint, this is the preferred solution.

A word of caution: Please consult with your business workers’ compensation insurance issuer to learn if your nanny is covered under your business policy. Generally the answer is no, and this presents a huge liability to the employer if not addressed in a separate workers’ compensation policy for the nanny. The same caution applies if you provide group health insurance and you want to cover your nanny too.

» More Information: Publication 926

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