I was recently asked, “How do I go about hiring my Mom to be a nanny?”  Unlike me, who would just try to pawn my kids off on my Mom whenever I got the chance, this person wanted to make it official: 1. She wanted to pay her mother for the work, and 2. She wanted to make sure all the tax stuff was handled properly.  If you’re thinking about hiring your Mom (or your Dad) here’s what you should know.

First, when you hire your parent for domestic work (including child care, housekeeping, etc.) your parent is exempt from social security and medicare withholding.  This makes the whole “hiring your parent” thing a lot easier.  There is an exception though, and I think a lot of families might fall into this category:

If you meet both of these conditions:  1. Your parent cares for your child who is under 18 or is disabled and 2. You are either divorced or widowed and not remarried, or your spouse is permanently disabled.  Note:  the rules don’t say anything about if you were never married, just divorced or widowed.  So, if you meet these conditions, then you do pay the payroll taxes.  Otherwise, just pay your mom every week.  She can report the income on her tax return and you can report that you paid her and claim the child care credit. Super easy, right?

If you do have to do the payroll withholding, it’s not that hard.  For 2011, you’ll want to withhold 5.65% to cover the employee’s share of payroll taxes.  You’ll wind up matching that amount when you file the Schedule H with your tax return (the household employee tax.)  You have the option of paying your Mom’s share of the employee tax and not withholding it from her pay. (You just don’t withhold and you pay double the employer’s tax, still pretty easy.)

You do not pay FUTA (federal unemployment taxes) on your parent no matter what the circumstance.

You may be required to pay state unemployment insurance, you’ll have to check with your state.  Here in Missouri, you’ll pay unemployment insurance if you pay your parent over $1,000 per quarter.

You will need to provide your parent with a W2 after the year is over showing the income paid, whether you withhold the payroll taxes or not.

For more information of household employees, check out IRS publication 926.

To check out the Schedule H, click on this link:    Schedule H.

Addendum:  shortly after I posted this blog, I read an article about nanny’s that get paid over $150,000 a year.  If you pay your nanny over $106,800, then you don’t need to withhold the social security tax on any amount over that.  (You still withhold the medicare.)  If you do pay your nanny that amount, I’d just like to point out that not only am I really good with children, but I can also prepare my own payroll and do all the associated tax forms that go with it.  (Just saying.)