Figure Out Your Nanny Tax

Ask any employed mother what she needs or values most, and chances are she'll say "good, affordable child care." If you are lucky enough to have found a baby-sitter or nanny who is terrific with your children and whose paycheck doesn't wreck your budget, you may think you're home free.

Not quite. The Internal Revenue Service wants its share of your nanny's paycheck, and the rules are tricky. The consequences for ignoring the nanny tax are stiff penalties and interest -- or worse. Remember Zoe Baird, who lost her chance to be attorney general because she neglected to pay payroll taxes for her household help?

The first thing you have to ask yourself is, "Do I have a household employee?" If you hired someone to work in your home and you can control what work is done and how it is done, you have a household employee. In general, a baby-sitter who takes care of your children in her own home is not your employee; a lawn-care worker who brings her own tools and controls how she cuts your grass is not your employee; a baby-sitter or nanny who works at your home and follows your instructions is an employee. It doesn't matter if your nanny is part-time or full-time, if you hired her on your own or through an agency, or if you pay her hourly or on salary. It's a matter of who controls the work, and it's probably you.

If you have a household employee, you have to make sure she can legally work in the U.S. You both must complete the Immigration and Naturalization Service Form I-9 no later than the first day of work. Keep the completed INS form with your records in case a government official asks to see it.

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