A nanny-share is defined as two families sharing the expense of employing a nanny to care for their children as a group. The nanny and children may alternate between the two family homes, but care is provided to the children of both families as one job for the nanny. The nanny has two employers, each paying their agreed-upon share of her compensation.
If two families hire the same nanny to care for their children, but the care is provided separately, this is not a nanny-share arrangement. In this case, the nanny has two part-time jobs.
Each family is required to establish themselves as a household employer with the IRS and the state. The families should pay the nanny separately and withhold and remit payroll taxes appropriately to the IRS and to state agencies on their portion of her salary.
Although it may seem administratively easier to have one family handle tax withholdings and remittance on the full salary, this creates risk for the family who is not registered as a household employer with the IRS and the state tax agencies. In addition, there is risk for the family who pays the nanny in full and then has to collect from the second family.
Tax Breaks Available When Both Families Pay Legally
Tax breaks are available when tax accounts are established with the IRS and the state to prove the nanny is paid legally. When each family is established as a household employer and is properly handling employer tax obligations on their portion of the nanny-share, they are entitled to a tax break of up to $2,500 per year.
Most families in a nanny-share realize tax savings that far exceed their employer tax costs, so they actually come out ahead financially. For more information about tax breaks, see Dependent Care Tax Breaks or visit our Employer Budget Calculator for an estimate of your savings.
Tom Breedlove is a Partner at Breedlove & Associates, the nation's leading specialist in payroll, tax, and HR services for household employers.