11 Factors When Budgeting for a Nanny
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.
The International Nanny Association’s Salary and Benefits Survey is a good resource to get a sense of the going rates in your area for a nanny with your desired skill set.
Always negotiate wages with your nanny based 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.
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 and supersede federal law if it is more beneficial to your employee.
3. Nanny taxes
If you pay your caregiver $2,100 or more in a calendar year, you’ll owe employment taxes. You’ll pay 7.65 percent of your nanny’s wages into their Social Security (6.2 percent) and Medicare (1.45 percent) accounts. These are called FICA taxes and you’ll withhold the same amount from your nanny’s pay. Or you can choose to also 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 can manage all of your tax and wage responsibilities for $65/month. You could also try to do it yourself or pay your accountant to handle your payroll and tax obligations.
4. Workers’ compensation insurance
Your state may have a workers’ compensation requirement for household employers (in New York, it’s mandatory if your nanny works at least 40 hours in any week). Coverage may cost a few hundred to several hundred dollars a year. Only a couple of states – California and New Jersey – allow you to add workers’ comp for a household employee to your homeowner’s policy. Get a workers’ compensation quote from GTM Payroll Services.
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 (concierge medicine is only $12/month) if you’re making contributions and may offer some tax savings. If your nanny makes pre-tax contributions to a health plan, that lowers their gross wages and your tax liability.
6. Agency or online job site fees
Searching for a caregiver should also be part of your budgeting for a nanny. You may be able to find a nanny through a referral from a friend, neighbor or colleague. Social media outlets like Facebook groups are another free way to post your job. But many families end up using an online job site or a nanny placement agency to find their nanny.
Free searches on online job sites are usually limited so you wind up paying their monthly fee. Just remember to cancel your membership when you no longer need it as some sites will continue to automatically bill you even if you’re not using the site.
An online job site will cost less than a nanny agency but they aren’t as efficient as you may think. Families going through an agency spend less time on the hiring process, find higher quality nannies, and keep them for longer than those using an online job site. The nanny agency’s placement fee may well be worth the investment. An agency will also help you with job descriptions, interviewing, and work agreements as well as provide other resources.
7. Back-up care
Here’s another area where an agency can be helpful. There will be times when your nanny calls in sick or takes paid-time off. An agency may be able to send a temporary caregiver to your home for the day or even for a week if your nanny is on vacation (A New England Nanny can do this). There is a cost involved but it may be more convenient if you can’t take time off work or rely on family or neighbors to help out. Your employer may also offer back-up care as a benefit.
8. Background checks
Your agency likely has performed background checks on all of their candidates saving you the time and expense to perform them (yes, A New England Nanny does this). 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.
9. Year-end bonus and raises
According to our recent survey of nannies, most receive a year-end bonus of at least $750. You may also want to consider potential raises after performance reviews. If you find a great nanny, you’ll want to do everything in your power 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.
10. Entertainment and activities
Will your nanny take your kids to the zoo, museums, pool, theater, beach, movies, out to lunch, or to any number of entertainment venues or educational opportunities? This may mean signing up for memberships or planning ahead 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.
11. Transportation costs
If your nanny will be taking your children out of the house, you’ll need to consider modes of transportation. Will they use public transit like buses or the subway? Then they’ll need passes. Or will your nanny drive? If your nanny is driving, will they use their own car or will you provide one? You may be better off having your nanny drive a family car. That way you’re in control of 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 own car, you could reimburse them for mileage. The IRS standard mileage reimbursement rate is 58 cents/mile.
So far we’ve detailed your expenses from wages to benefits to transportation costs 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 into an 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. An 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).
Nanny tax calculator
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.
GTM can help
If you have any questions or need assistance in budgeting for a nanny, call GTM Payroll Services at (800) 929-9213 for a free, no-obligation consultation. Our team of household employment experts will be happy to help!