The nanny tax is a tax that many families know about but few actually pay. Part of the problem is the confusing nature of this tax and understanding what your family’s obligation actually is if you have a household employee.  Part one of this post explained what the nanny tax is and how to determine if you are required to pay it  (Hint: if you are paying your nanny more than $1700 per year, you should be filing taxes on her). I sat down with tax and business consultant Bonnie Yormack, principal of  New York-based Lynn-Mark Tax & Business Consultants, to find out more about the nanny tax. Bonnie also happens to be my tax preparer and has given me much good financial advice over the years. Here is part two of my interview with her:

There are so many people who are paying their nannies and part-time baby sitters “under the table” – should I really be concerned with paying these taxes?
Yes. It’s the right thing to do and it’s the law.  Any individual whom you employ to provide services in your home whom you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold ($1700 in 2011) must receive a W-2 from the employer (family) and you, the employer, must pay the payroll taxes

How do I file taxes on my nanny? Do I need to hire an accountant or can I do it on my own?
Your  nanny payroll taxes are added to your family’s personal income tax liability. Most families with full time staff will make quarterly payments of the nanny payroll taxes using 1040ES estimated tax payment coupons. The Internal Revenue Service (IRS) collects the nanny payroll taxes. They are summarized annually on the family (employer’s) Form 1040 Schedule H – an attachment to your family’s personal federal income tax return. Separately, as the employer, you are typically required to register for and make quarterly payments of state unemployment taxes. These unemployment taxes are paid to the state where the work is physically performed. You can file these taxes on your own or you can choose to hire an accountant.

Where can I learn more about the nanny tax and what my obligations are?
Go to your state website and IRS website to learn more or speak with your accountant.

What’s the biggest tax mistake you see your clients make year in and year out?
Some household employers forget to make quarterly estimated tax payments. If this happens, they may get substantial underpayment penalties at year end should the total family income tax + nanny payroll tax liability be too large.

If someone would like tax preparation services or financial advice, what’s the best way to get in touch with you? Please visit my website www.lynnmark.com; email me at taxquestions@lynnmark.com or call me at (212) 213-6592.

For those of you looking to figure out how to pay your nanny taxes, Bonnie is a great resource. You can also check out the very informative www.nanny4hire.com, which provides a wealth of detailed information and advisory services. As for me, when I hired D2′s nanny last year, Bonnie helped me get my employer ID number and set up my quarterly tax payments. I track all of my nanny’s paychecks by month on a simple Excel spreadsheet, which I send to Bonnie at the end of every quarter. Bonnie then files my taxes and sends me our 1040 coupon, which states how much tax I owe that quarter. I write a check, mail it off and I’m done.  In the beginning I considered filing my own taxes but I can tell you that it’s far easier to let your accountant or hire a payroll service to do it for you. As a busy mom, I have enough to worry about without trying to figure out the complexities of the US tax code.  What’s your experience with the nanny tax? What other information resources do you recommend?

My husband has a lot of great qualities but housekeeping isn’t one of them. About a year ago, I was working long hours and was struggling to keep the house clean and organized to my exacting standards. My mother is the ultimate Boss Mom and I frequently seek her advice. One
day I called her on a Saturday in tears frustrated and exhausted.

“MomIamsotiredandthehouseisafreakingmessandhewontheeelpppme!” I wailed. “Sweetheart, why in the world are you still trying to do everything yourself? How many times have I told you to outsource?” My mother is so smart. Why was I killing myself? A few days later, I asked my stylist, Carl (who has a hookup for just about anything) if he knew a good housekeeper. He introduced me to Francisca who changed my life and probably saved my marriage. She came a few days letter with a crew of four other women. Two hours later the toilets were so clean I could have served dinner out of them. My baseboards shined and the kitchen gleamed. Even my husband, who initially kicked up a big fuss about not wanting “strange ladies” in the house, was impressed. Francisca now comes three times a month to clean the house. I love her so much I’m contemplating increasing her cleaning sessions to weekly and asking her to do laundry. I love coming home on those Fridays to find a spotless, fresh smelling home. Bonus for me, I don’t have to spend my Saturdays cleaning the shower and mopping floors. I admit it. I’m an outsourcing devotee now and have no plans to turn back After receiving an on-line coupon for discount diapers, I placed my first order for a jumbo box of Pampers through Diapers.com. This site carries anything you might need for a baby including items for your nursery, baby clothes, toys and the like. Prices are anywhere from 10% – 20% off of retail store prices for some items. Big bonus, shipping is free and your order will arrive in two days. They even send you a reminder when it’s time to reorder your diaper supply. Best of all? No late night runs to the store because we’ve used our last diaper. Even better, their sister site Soap.com, features cleaning supplies, toiletries and household goods like trash bags and paper towels at below retail prices. And the site will conveniently ship your Diapers.com and Soap.com orders together.

Last winter I discovered Dream Dinners. It’s a terrific resource for busy families. With Dream Dinners you can assemble healthy, gourmet meals on their premises (I confess that I pay the extra $10 bucks and have them pack the meals for me) that can be frozen and then defrosted for the days you don’t feel like cooking. The menu changes monthly and they have a wide variety of entrees and sides to mix and match to create your own gourmet meals. My local grocery store has an online shopping service where you pick your groceries online and they’ll bag them for a pick up time of your choosing. And I’ve just been turned on to Southern Foods, a service that delivers hormone and antibiotic free meats and organic vegetables direct to your home along with a wide variety of dry goods. They will even unpack your purchases and put them into your freezer. What’s not to love? I’m excited to try this service out.

I’m nothing if not pragmatic. The reality is that working moms need help; and sometimes you’ve got to pay for that help. These days I am all for trying anything that will save me time so I can be with my family. I’ve decided that my time is valuable and that for some things, like housework, it pays to pay someone else to do it. Tell me, what do you think of outsourcing? A marriage saver or a waste of hard-earned money?