We are employing a nanny for our 6 month old. What service do you recommend for managing taxes and payroll?
Is it possible to do on our own? If so, where do we start?
For Federal Return, Schedule H and its Instructions are a great start. You are the nanny's employer, and are responsible for FICA (social security and medicare) withholding, and also paying the employer portion. You will offer her a W4 so she can tell you how much federal and state tax to withhold. You'll use Circular E the employer's tax guide to calculate withholding. In January, you'll give her a W-2, and file the information with your own tax return.
For State, some of the above applies, but as I recall, in my state, I had to submit withholding quarterly separate from my return. As compared to Federal, where I adjusted my own withholding so at year end the tax paid was correct. Unemployment insurance also needs to be paid, I believe this is state.
This issue is non-political - I told my friends at the IRS that (a) the disparity between state and federal to handle the nanny tax was confusing for those of us trying to comply,
and (b) even though we are treated as an employer, a 'guide to the nanny tax' would be helpful, a single IRS doc that doesn't mix non-nanny type issues into the mix.
In the end, if a service is cost effective, go for it, your time is valuable, and thi is something that only lasts a few years.
Whether to employ a payroll service to handle the taxes (and possibly the payroll itself) is a matter that depends on how savvy you are with respect to your own taxes and with using computers in general. If you are comfortable using programs such as Excel, or Quicken, or TurboTax, or TaxAct etc, then taking care of payroll taxes on a nanny's wages all by yourself is not too hard. If you take a shoebox full of receipts and paystubs to your accountant each April to prepare your personal income tax returns and sign whatever the accountant puts in front of you as your tax return, then you do need to hire a payroll service. It will also cost you a bundle since there are no economies of scale to help you; there is only one employee to be paid.