Health insurance is a real concern for many nannies, especially single nannies who don’t have coverage under a spouse’s or parent’s plan. Many families find that providing a health insurance stipend for their nanny is a win-win, as this is non-taxable compensation, saving the family on employment taxes as well as the nanny. So, what are best practices?
Q. What does the family need to do regarding documentation to keep the health insurance non-taxable?
A. A family needs to have evidence that the nanny actually HAS health insurance in place, and that the policy cost is equal to or greater than the stipend. The easiest way to do this is for the family to write the check for the stipend directly to the insurance carrier. If that is not possible or desired, the family needs to:
1. Obtain and retain a certificate of coverage that shows the period and amount of the premium. This needs to be up to date, so you may need to do this semi-annually or annually depending on the policy.
2. Either write a separate check for the stipend with the memo clearly stating the purpose (BC/BS POLICY NUMBER July 2013 for example) OR provide a pay stub to the nanny stating gross wages, itemized deductions, net pay, and the addition of the premium contribution to the net pay as a reimbursement item.
Q. What are the tax benefits to the family?
A. The health insurance premium stipend is not taxable wages. The employer does not include this in the employee’s taxable wages on the W-2 form, and does not pay Social Security and Medicare taxes (7.65%) nor Federal or State Unemployment taxes on the premium (~3.5 – 4% depending on the situation).
Q. What are the tax benefits to the nanny?
A. Because the health insurance premium stipend is not taxable wages, the nanny does not pay Social Security and Medicare taxes (7.65%) nor income taxes (variable, estimate 15% for Federal and state) on the premium stipend.
Q. Are there any audit risks involved?
A. The biggest risk is that the family is paying the stipend and the nanny allows the policy to lapse. Retroactively this would make the premium stipend taxable, and at that point the family would be on the hook for the employer and employee Social Security and Medicare taxes (15.3% total) as well as the unemployment taxes. This is why it is a best practice to make payments directly to the carrier.
A typical health insurance plan for a healthy single nanny can run $500 or more a month. This is $6000 a year. Many families offer a partial premium benefit at time of hire, and will discuss picking up more in lieu of a raise when the compensation is reviewed.
A family who contributes $3000 a year saves approximately $330 in taxes (11% of the benefit!) and the nanny saves approximately $675 in taxes (about a week’s pay!).
Families enrolled for HomeWork Solutions payroll services can have the paystub properly set up for the reimbursement, and if they wish to pay the insurance policy directly the employee share can be deducted from the payroll and HomeWork Solutions will forward the entire premium to the insurance carrier.
HomeWork Solutions is one of our NannyFusion members
