With the federal tax filing deadline just a few days away, don’t miss out on these money-saving tax breaks if you worked with a nanny in 2021 or are currently with a nanny in 2022!
In today’s video, “Watch This Before Filing Your Taxes! Nanny Tax Breaks (2021 and 2022)”, I sit down with Tom Breedlove, Senior Director of Homepay to discuss how your family can save money on your 2021 taxes and what changes might affect you for the 2022 tax year.
– Child Tax Credit
– Child Care Tax Credit
– Build Back Better Act
– Dependent Care Flexible Spending Account (FSA)
– Who qualifies for these tax breaks
Did you know you can get a tax break if your kids attend summer camp (i.e. sports, Lego, Minecraft camps)? I didn’t and this video helped my family save money on our 2021 taxes!
I learned about several new tax breaks while producing this video and hope that you do too.
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A transcript of the video can be found below:
Hi everyone, Laura from Nanny Parent Connection here.
Tax season is upon us which also means its time to maximize your tax breaks! This year is a bit different. There are some childcare-related tax breaks for 2021 that might be different for your 2022 tax return.
Please join me as I sit down with Tom Breedlove, Senior Director of Business Development for the payroll company Homepay. And trust me, you don’t want to miss this, even I learned about several tax breaks that I didn’t know about before!
Laura: Hi everyone, I’m here today with Tom Breedlove, Senior Director of Business Development for Homepay. Thank you so much for joining us today Tom.
Tom: Thanks for having me, Laura.
Laura: So today I have a few questions about nanny taxes, and how to handle them for the current year. Right now we’re dealing with 2021, but I also want to ask you about any changes for 2022. So, thank you again for walking us through all of this.
Laura: So, let’s start with clients who are working right now on their 2021 tax returns, what are the 2021 tax breaks that these families should know about as they pertain to child care?
Tom: A lot of people have heard of the Child Tax Credit, but there’s also a thing called the Child Care Tax Credit which is really important to families, and the way that works is that that tax break allows families to itemize this last tax year (2021) up to $8,000 per child with a cap of $16,000 per family. So, if you have more than two kids you have to stop at $16 000, but what that allows you to do then is take any dependent care, it could be a daycare center, it could be fees paid to Nanny Parent Connection to find a nanny, it could be wages paid to the nanny, taxes paid in association with these wages for the nanny, even day camps count, and families can then itemize up to $16,000, and then take a credit of up to 50% on those dollars, and that 50% actually can fluctuate a little depending on how much your adjusted gross income is.
But, for a lot of families, it will be 50% or close to that. So, you can see that families could make as much as $8,000 in tax savings just by taking advantage of this Child Care Tax Credit, and these raised expense limits.
But, if you have an accountant, we can actually prepare or work with your accountant to get a Schedule H prepared to get wages paid in from last year, all documented properly so that the accountant can then follow the family’s tax returns. It may be that we’re at a point now where we want to try to get an extension, but that’s very common so that your accountant can file an extension we can get the Schedule H and any other documents prepared, and then when your accountant files it, you’ll be able to take advantage of all those tax savings and maybe get up to $8,000 back if you have two or more kids. So, it’s a good year for the Child Care Tax Credit.
Laura: Wonderful! So, I learned a couple of things here. I learned that sending my child to a summer camp during hours that my husband and I are working is actually something that can be a tax credit for those expenses. So, that’s interesting, I don’t think I ever actually knew that before.
And then the other thing is that, if I’m a family who has been just paying my nanny in cash, maybe under the table, it’s not too late for this year to retroactively bring everything up to speed legally with regards to taxes, and then also to be able to take advantage of those tax breaks.
Tom: That’s exactly right!
Laura: That’s fantastic!
Tom: Yeah, and those camps that you brought up, they can be any kind of camp.
Laura: Just not overnight camps right?
Tom: Overnight camps are excluded, the premise is that attendance at the camp has to be so that the parents can work. But, any kind of day camp during the summer would qualify as long as it is not an overnight camp.
Laura: Okay, wonderful, that’s great news! And then for a family paying a nanny in the 2022 tax year, how do the tax breaks work for 2022, and are there any changes?
Tom: Yeah that’s a great question, and honestly we’re in kind of in a fuzzy area right now, because the Build Back Better Act, which is currently stalled in Congress, would actually change the amounts that families could save for 2022.
The worst-case scenario is it will revert back to the level it used to be before 2021, which is $3,000 per child with a cap of $6,000, and then families can itemize, or use the tax credit percentage against those expenses. So, what were finding and what I would probably tell your families is this year, the most lucrative tax break will be a Flexible Spending Account (FSA). A lot of large and small businesses offer an FSA to an employee. They have what’s called an open enrollment in the fall of 2021 in anticipation of 2022. But what a lot of people don’t realize is that there are a lot of opportunities to get in mid-year because there are what they call life-changing events, and if you have any kind of life-changing event which is switching jobs, changing care providers, or switching from a daycare center to a nanny, for instance, that’s considered a life-changing event. If you had a baby, that would also qualify as a life-changing event.
So, there are a number of things that each Human Resources Department has the ability to use as an opportunity to enroll mid-year. You usually have a 30-day window around those events, so I would encourage your families that if they just had a baby or if they just switched jobs, or experienced any of the other life changing events I mentioned previously, go ahead and talk to your HR department. See if you can get in mid-year because they do have a number of loopholes that might work for you. Even if you aren’t sure your event qualifies, talk to your HR department.
But then, you’ll be able to set aside up to $5,000 per year, and then you as a taxpayer wouldn’t have any taxes on that $5,000. So, your families wouldn’t have any income taxes, any social security, and medicare, all those taxes that typically get taken out, for that $5,000.
So, it typically saves families close to a couple of thousand dollars a year, and this year unless the Build Back Better Act passes, and actually gets increased a little bit. I’m thinking that the FSA will probably be the best bet for most families if they can enroll.
Laura: Right, okay that makes sense. My key takeaway from that is, to be in touch and be good friends with your HR department. You can reach out to them, and they can kind of walk you through anything that should be on your radar, based on what’s happening in your life.
Tom: That’s exactly right. And, if you know if your families have any questions about any of this, or if they want to understand more about what if I become a household employer, and I put my nanny on the books, what are the costs, I know there are some taxes, what is all that going to cost me.
We have a team dedicated to helping families budget, and we can help you understand what the taxes will be as an employer, and then what the tax breaks might be, and often times the tax breaks will offset a large percentage of the tax cost. So, most families don’t have to come out of pocket too much to pay legally.
Laura: That’s a really great point because that is a concern that families may have when considering nanny care budgeting, and how much those nanny taxes are going to cost. And I do have some budgeting tools that I also offer families, but it’s important to know that if you do things legally, those tax breaks are there for a reason. They do offset those nanny taxes, which are a concern for so many.
Tom: They do, and back to the 2021 tax year. I think this year more than ever, many families will come out ahead because of that $8,000. This amount may far exceed by thousands of dollars what the employer taxes would be.
So, you know you could really gain some net positive cash there.
Laura: And nobody will ever be sad about that, that’s for sure!
Tom: That’s right!
Laura: Okay! And, does everybody qualify for these tax breaks?
Tom: Yeah that’s a great question.
The way the laws are structured, the dependent who is receiving care has to be under the age of 13, or if they’re over the age of 13, they could still qualify but they have to be mentally or physically unable to care for themselves. So, there are some exceptions. But, usually under 13 and then the other restriction is that all parents have to work or be full-time students. But as long as those two things are met, there are no income restrictions, no matter how much a family makes, they can still take advantage of these tax breaks.
Laura: And then if people have questions about how this works, can they reach out directly to Homepay to get in touch with people who are really familiar with the laws?
Tom: Absolutely! We have experts at the ready so they can call anytime, and we will have a free expert available to help with all the budgeting, all the questions they might have about legal pay, what it means for their nanny, what it means for them, the financial aspects of it that we already talked about, we can walk through that and explain what the state requires and what the IRS requires.
Once they understand all the benefits their nanny gets, and all the risks that they’re assuming for themselves, a lot of folks do decide to pay legally, and if they do decide to pay legally, we can certainly explain what we do to make that super easy for families because we have a service that takes care of everything, so they don’t have to spend their weekends trying to do tax stuff.
Laura: And having done taxes both ways before, handing off to a payroll company versus doing payroll for our nanny ourselves, I can personally attest to the fact that it is so much nicer to be able to hand off. When I say so much nicer to hand off I mean my husband because I wasn’t the one who handled that. I know he appreciates the extra time, but yeah it’s really nice to know that you guys, this is what you do all day long, you can really go into this and be able to trust that things are going to be done correctly, you know people are going to get paid on time, that sort of thing.
So, I always encourage families just do one less thing, and just hand off the payroll, it’s so nice.
One last question actually, it just made me think about who can call and ask for help! Can nannies call and ask you for help too if they have questions about taxes or legal pay?
Tom: Yeah. we get quite a few nannies who do call and have questions, and it’s usually around like the W-4 when you’re trying to pick withholding and how many allowances should I choose, and that kind of thing. But, we also get a lot of questions about you know Social Security, and how the earnings credit work, and Medicare, disability, unemployment, and obtaining loans. Things like the Child Tax Credit for nannies, because a lot of them have children and they’re able to then take advantage of that. So, there’s a number of tax-related things, work agreements, paid time off, paid sick leave, those kinds of things a lot of times nannies have questions about that, just like families do, so we’re here for them as well.
Laura: Okay, wonderful! It’s good to know that anyone can reach out, and you guys will be able to help. Well, fantastic! Thank you so much for joining us today. I really appreciate all of your professional help and insight, it’s a lot for families to navigate, and it’s just nice to know that you guys know what’s going on, everything will be done right, and just to have someone to turn to with those questions. So, thank you so much for joining us!
Tom: Thank you, we’re here to help!
Laura: Alright, take care, Tom!
Tom: Thanks, Laura!
Alright, everyone, I hope you learned about the tax breaks that are available for 2021, as well as some of the changes to the tax laws in 2022 that are pending currently.
Please click here If you have questions about nanny taxes, questions about nanny payroll, or if you’re interested in setting up nanny payroll with Homepay.
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