Should I be withholding income taxes on my nanny/babysitter and issue a W-2, or should I issue them a 1099-NEC (Non-Employee Compensation)? The answer to this is situational dependent and sometimes requires a more thorough investigation by your tax professional into your exact situation. However, there are a few key distinctions between an employee, an independent contractor, and a side hustle. Some of the issues that need to be addressed are: what are the duties of your nanny, do you have restrictions on the way they do their duties you have assigned them, and what all are you paying for?
Let's a take a look at this and see if we can clear some of this up.
What are the duties of your Babysitter/Nanny?
The biggest concern when it comes to whether they should be issued a W-2 or 1099-NEC comes down to the duties. Specifically, what are you requiring of them to do? Think about getting a brand-new deck built at your house. The contractor will arrive, take down your requests, but ultimately are allowed to build the deck of your requests as they see fit. Compare that to an employee of the contractor who is W-2 paid. The employee must build the deck exactly as the contractor wants, in the order the contractor wants, and to the contractor’s specifications.
When we look at your babysitter/nanny, we look at the duties you have prescribed to them in your absence. Do you leave them with bare minimum instruction, and essentially ask that they keep your children alive and fed? Or do you have specific instructions such as “You must get the children Dominos for lunch by 11:30. You also need to clean the living room by 4, and please start with behind the TV as it’s the dirtiest.” In the first situation, your babysitter/nanny is acting as an independent contractor, with freedom to perform the tasks of keeping the children alive and fed at their own discretion. In the second example, the babysitter/nanny is acting in the capacity of an employee. The difference being that you as the parent have enacted specific duties the individual must perform, to a specific standard of your choosing.
We would also want to confirm the distinction between nanny vs babysitter. A nanny generally has more tasks such as maintaining and cleaning the home, while a babysitter may specifically have the task of watching the children only. If you have hired a nanny, who is doing regular cleaning for you in your home, they ARE a household employee and should be issued a W-2. If they are mainly watching the children and are more of a babysitter, then an argument could be made to the 1099. Another situation to look for is if this is their business or if they are doing this for you and only you. If this is their business, then no W-2 should be issued. If they are only babysitting/house cleaning/nannying for you, then an argument can be made they should receive a W-2 as an employee.
Do you have restrictions on the way they do their duties you have assigned them?
As this individual is watching your children it is understandable you will have certain restrictions for the babysitter/nanny. The question becomes, how prevalent are these restrictions when it comes to their performance of their tasks? For example, does the babysitter/nanny have to check in with you before taking the children to the park for the playground, or are they allowed to take them freely without your input? If they must check in with you before taking the children places, this is more of an employee position than an independent contractor. We would also need to look at food restrictions, if you allow the babysitter/nanny to pick the food options vs restricting them to certain restaurants. Most of the questions that come into employee vs independent contractor are directly related to the freedom allowed to the individual performing the work.
What are the items you are paying for?
One test that normally gets people into trouble is what are you paying for when it comes to your babysitter/nanny? If you reimburse your nanny/babysitter for costs they incur on the job, you have automatically made them an employee. Unless there is a contract in existence between yourself and the babysitter/nanny, any reimbursements you make to them for costs incurred can be viewed by the IRS as fringe benefits from an employer to an employee. If, however; you leave money on the table for the babysitter/nanny to use for the kids for the day then you may still have an argument for them being an independent contractor. What would need to happen is a contract that exists specifying any costs incurred by the babysitter/nanny would need to come out of that money left on the table, and if any excess costs incurred, they need to be covered by the babysitter/nanny to be deducted on their Schedule C.
Summary
Hopefully the above gives you an idea of the tax consequences when it comes to your babysitter/nanny. The IRS takes the difference between employees vs contractors seriously, and has stringent requirements when payments are being made to another individual. These are just three things to look for in your own unique situation that could affect your tax filings. There are more things to consider that could change depending on your situation. Please reach out to Info@DeepSouthBookkeepingServices.com for more information on the potential tax consequences or to get a second opinion on your unique situation with your nanny.
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