Nanny Tax: What You Need to Know

March 25, 2014

You must pay employment, Social Security and Medicare taxes when you hire someone to take care of your kids. The good news? You may be entitled to take the child and dependent care tax credit if you pay a nanny to watch your child or hire someone to take care of an incapacitated dependent while you — and your spouse if you file jointly — work or look for a job.

You are eligible for the credit on a sliding scale from 35 percent if your adjusted gross income is $15,000 or less to 20 percent if your adjusted gross income is $43,001 or more. Expenses are limited to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.

To qualify, the individual must be your dependent child under the age of 13 when the care was provided or your spouse and certain other individuals who are physically or mentally unable to care for themselves.

Other requirements to claim the credit are:

  • The qualifying person generally must have lived with you for more than half of the year. There are exceptions related to birth, death and divorce.
  • You – and your spouse if you file jointly – must earn wages, salaries, tips, other taxable compensation, or net earnings from self-employment .
  • The payments cannot be made to your spouse, anyone you can claim as a dependent, or your child who will not be age 19 or older by the end of the year even if that child is not your dependent. You must identify the care-provider on your tax return.
  • The qualifying expenses must be reduced by the amount of any dependent care benefits you receive from your employer that you deduct or exclude from income.

Costs of other services qualify for the credit as long as they relate to the care of the dependent person. These can include costs for domestic cleaning; meal preparation; food, lodging, clothing or education when incidental to and inseparably part of the care; and nursery school, pre-school and similar programs.


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