Budgeting For a Nanny
No one needs to tell parents that childcare can be expensive. Whether you choose a daycare center or an in-home caregiver, you’ll want to get a complete picture of your financial obligation. When hiring and employing a nanny, you should factor all costs beyond their wages so there are no surprises that could bust your budget.
1. Hourly rate of pay
This will be your biggest expense in budgeting for a nanny. There are several influences on how much you’ll pay your nanny, such as:
cost of living in your area
a nanny’s skills, experience, training, and education
live-in or live-out (live-in nannies could be paid less because they are receiving room and board)
full-time or part-time
number of children in your nanny’s care
Remember, it’s the law to pay your nanny an hourly rate and not a salary.
Always negotiate wages with your nanny based on a gross hourly rate. This is their pay before taxes and other deductions. Nannies can use a nanny tax calculator to determine their net – or take-home – pay. A nanny’s net pay can vary depending on how much income tax they want to be withheld from their wages.
Entry-level nanny candidates in the Nashville area typically start around $25/hr. gross. and Nashville Nanny Agency’s candidates typically average around $30-35/hr.
2. Overtime
The federal Fair Labor Standards Act requires nannies and other household employees to be paid overtime for hours worked over 40 in a week. Your overtime rate needs to be at least time-and-a-half. So, if you employ a nanny for 50 hours a week at $20/hour, their weekly gross pay will be $1,100 (40 hours x $20 + 10 OT hours x $30). State laws may vary for live-in employees and would supersede federal law if it is more beneficial to your employee.
3. Nanny taxes
You’ll owe employment taxes if you pay your caregiver $2,700 or more in 2024 (or $2,800 in 2025). You’ll pay 7.65 percent of your nanny’s wages into their accounts for Social Security (6.2 percent) and Medicare (1.45 percent). These are FICA taxes; you’ll withhold the same amount from your nanny’s pay. You can also choose to pay your caregiver’s share of FICA taxes.
If you pay your nanny $1,000 or more during any calendar quarter, you’ll also pay federal unemployment taxes, which is six percent on the first $7,000 in wages. You may also owe state unemployment, which can be around two to five percent on a certain amount of your employee’s gross wages.
A comprehensive nanny tax and payroll service (like GTM) can manage your tax and wage responsibilities for around $70/month. You could also try to do it yourself or pay your accountant to handle your payroll and tax obligations.
4. Workers’ compensation insurance
Ask your homeowner's insurance company if it’s required within your policy or if you already have coverage under an umbrella policy. If it is required, coverage can cost a few hundred dollars a year.
5. Benefits
Offering health benefits or a retirement plan is a great way to attract the best candidates for your position and increase your employee’s job satisfaction. Benefits can be affordable and may offer some tax savings.
6. Agency placement fees
Nashville Nanny Agency has a $500 registration fee and at the time of hire our one-time placement fee ranges between 12 - 18% of the nanny’s gross annual income.
7. Background checks
Nashville Nanny Agency performs background checks on all of its candidates, saving you the time and expense of performing them. If you aren’t going through an agency, you can expect to pay about a couple hundred dollars to get comprehensive background checks on your nanny. These can include checks of the sex offender registry, criminal convictions, driving record, Social Security number, credit history, professional licensing as well as drug testing.
8. bonus and raises
Most candidates receive a year-end bonus of 1 week of pay. You may also want to consider potential raises after performance reviews. If you find a great nanny, you’ll want to do everything you can to keep them on board. Providing feedback on their performance, setting goals, and rewarding excellent work helps keep your nanny happy and engaged in their work.
9. Entertainment and activities
Will your nanny take your kids to the zoo, museums, pool, theatre, beach, movies, lunch, or any other entertainment venues or educational opportunities? This may mean signing up for memberships or planning to buy discounted tickets. You could give your nanny cash to pay for these expenses or provide them with their own credit card. Or your nanny can pay with their own money and provide an expense report for reimbursement. However you manage these activities, they should factor into your budgeting for a nanny.
10. Transportation costs
If your nanny will be taking your children out of the house, you’ll need to consider modes of transportation. If your nanny is driving, will they use their car, or will you provide one? You may be better off having your nanny drive a family car. That way, you control the vehicle’s safety and maintenance. You’ll just need to add your nanny to your auto insurance policy. You may see a slight increase in your auto insurance premium if your nanny is young or has a poor driving record.
If your nanny will drive their car, you could reimburse them for mileage. The 2024 IRS standard mileage reimbursement rate is 67 cents/mile.
+ Tax savings
So far, we’ve detailed your expenses when budgeting for a nanny. Now, let’s get into how much you can save on your taxes. There are two main ways to realize tax savings on your childcare costs:
+ Flexible Spending Account
Your employer may offer a dependent care flexible spending account (FSA). You can contribute up to $5,000 a year to a Dependent Care FSA if you’re a single parent or a married couple filing a joint tax return or up to $2,500 a year if you’re married and filing separately. A Dependent Care FSA lowers your taxable income as funds are taken out of your paycheck before taxes are calculated. You can then submit your nanny’s wages as a childcare expense to be reimbursed from your FSA.
+ Child and Dependent Care Tax Credit
With the Child and Dependent Care Tax Credit, you can count up to $3,000 in expenses for one child and up to $6,000 for two or more children. The amount of the credit is based on your adjusted gross income and ranges. Most families that hire a nanny get a tax break of 20 percent of their expenses (up to $600 for one child and $1,200 for two or more children).
Use a nanny tax calculator when budgeting for a nanny to figure out your total employer responsibility (wages and employer taxes) and how much you can save through an FSA and the Child and Dependent Care Tax Credit.
Also, be sure to ask your payroll company about ways to set up and save with QSEHRA AND ICHRA advantages! Payroll companies we like to work with include HomeWork Solutions and GTM.
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