Whether you are a dual doc family, a doc with another professional, or a single doc with children, child care is one of the most significant and essential expenses you’ll need to address.
We wrote this article to help you understand the financial decisions, responsibilities, and consequences of hiring a nanny.
Compensation for your nanny is one of the most basic yet misunderstood decisions you need to make. There are many ways to get in trouble here.
You must pay your nanny hourly, not on a salary
Paying your nanny as a salaried employee might appear like a win for everyone. If your nanny works fewer hours one week, they still get paid a consistent income. If they work a couple of hours of overtime the next week, you just pay them the same salary, right? Unfortunately, no.
Nannies are classified as “non-exempt” or protected workers, according to the Department of Labor’s Fair Labor Standards Act (FLSA). Therefore, you must pay a nanny for every hour that they work, and you must pay overtime of at least 1.5 times their hourly salary for every hour over 40 hours they work in a week. The FLSA defines a week as 168 consecutive hours or seven consecutive days. You can designate any hour of any day as the start of the week.
How to budget like a salary
To develop an hourly rate from a weekly budget, you need to estimate the amount of overtime the nanny will work. From there, you can work backward to determine your hourly rate.
If your weekly budget is $600, in a regular (no overtime) week, that equates to $15 per hour. If you take call every two weeks and average six overtime hours for your nanny, you can calculate the hourly wage that fits your budget. First, add the average overtime hours to your week (in this case, three hours). Next, pull out your algebra.
40 hours X (Hourly Rate) + 3 hours X 1.5 X (Hourly Rate) = $600
This works out to an hourly rate of $13, not the $15 we assumed with no overtime hours. You will want to use $13 per hour in your discussions with your nanny to stay within your average weekly budget.
NOTE: Make sure when you are discussing hourly rates with your potential nanny that you are both talking about pre-tax rates. Often when an hourly person states they need $15 per hour, they are thinking in terms of what they need to take home after taxes, not the gross pre-tax rate.
According to Nanny Counsel, guaranteed hours is an industry-standard. Guaranteed hours is not the same as a salary.
If you want your nanny to place your needs and time requests at the top of their priority list, you need to pay them a consistent paycheck. That is to say, even if you take time off from work, and don’t need your nanny’s services, your nanny needs to get paid.
With guaranteed hours, you are not just ensuring your nanny a paycheck; they are promising you their availability to work during those hours. For example, if you are on vacation with your child, you can still request that your nanny get the house ready for the children’s return. For example, purchasing groceries for the children’s meals, changing bed linens, and preparing the children’s wardrobe for the coming week.
You don’t want your nanny needing to look for other jobs every time you have time off from work.
If you choose to offer guaranteed hours, make sure you calculate the cost into your budget and determine the hourly rate, as discussed above.
One of the most fundamental duties you require of your nanny is their availability. You need to communicate very clearly with your nanny what hours and shifts you need them to work. As a physician with varying shifts or emergency calls, you need your nanny to be available and flexible to meet your schedule. Availability is another good argument for offering guaranteed hours.
Spell out for your nanny precisely what you want them to do for your child. Are they willing to work if your child is sick? Are they doing the cooking for your child? Do they need to arrange playdates and transport your child? Are they taking your child to the pediatrician? Are they expected to teach your child?
You can expect your nanny to do household chores necessary for the care of your child. These include preparing, feeding and cleaning up after your child’s meals, tidying up the playroom, and washing the child’s clothes and bedding.
If you want your nanny to help with other chores around the house, you need to be very clear about this upfront. These might include things like: grocery shopping for the whole family, picking up dry-cleaning, doing the family’s laundry, or cleaning last night’s dinner dishes. Household chores are not typically why your nanny became a nanny. Be prepared to pay extra if you want your nanny to help with these chores, or consider hiring a housekeeper. Nanny Counsel has a couple of well-written articles addressing this subject.
Pay according to the rules
Your nanny is your employee, not a contractor. You will pay them as an employee, and all of their withholding taxes and filings are your responsibility. You are their boss and the HR department. You are responsible for their performance evaluations, salary, bonuses, raises, and benefits.
The rules for employing and properly paying a nanny are numerous, detailed, and unforgiving of errors. You are hiring a nanny, so you have more time to spend enjoying your children, family, work, and free-time. I suggest that you do not fill this new-found freedom with a ton of federal employment, federal tax, state tax, and worker’s comp forms. Hire somebody to take care of the paperwork for you.
If you have a CPA, they can probably take care of all of this. Ensure that they have experience in this area and understand all of the requirements before you go this route. The costs we have seen for this level of service are around $250 per quarter.
Multiple service providers specialize in paying for household employees. These companies are typically internet-based and require minimal effort on your part.
Their fees are all in the $250 per quarter range.
Nannies often request health insurance as a benefit. It is not considered a standard that you provide health insurance for your nanny. Your nanny should have a couple of health insurance options available to them. If they are under 27 years old, they may be able to stay on their parent’s health insurance. Regardless of age, they can also look for health insurance from a private health insurance broker or obtain it on HealthCare.gov.
If you decide to help with your nanny’s health insurance, you can reimburse them through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). In 2020 the reimbursement maximums are $5,250 ($437.50 monthly) for an individual and $10,600 ($883.33 monthly) for a family.
Your nanny must provide you with proof of health insurance in a plan that provides Minimum Essential Coverage (MEC). As you can see from the list, it is highly unlikely that your employee has insurance that would not meet the minimum requirements for QSEHRA reimbursements. Also, your nanny will need to provide receipts for qualified expenses. More information can be obtained at HealthCare.gov. The administration of your QSEHRA can be added to the services provided by the payroll service providers listed above.
QSEHRAs can also be used to reimburse vision and dental expenses.
Make sure you discuss any paid vacation days you are providing for your nanny. Your vacation does not count as your nanny’s paid vacation unless your nanny happens to plan their vacation to coincide with yours.
Worker’s Compensation coverage will be provided by you in most states and set up when you start a payroll service. This cost can vary widely by state. If your nanny is injured in your house, your homeowner’s policy will not cover it. Your policy will cover contractors and guests in your home, but it does not cover employees. No need to worry, you are covered by the worker’s compensation plan that you signed up for because you hired somebody to do all of this for you. Whew!
If your nanny is transporting your child, they need to provide proof of auto insurance. I suggest you require maximum coverage for liability and comprehensive coverage on their auto policy.
If your nanny is driving your car, add them to your policy as an additional driver. Contact your insurance agent and find out what information they need to add your nanny. This cost is typically minimal unless they have a horrible driving record, in which case you probably don’t want them driving your kids around anyway.
Now that you have decided how much you can pay your nanny, what duties you want them to handle, and what benefits you will offer, you need to put it in writing.
We are not lawyers and cannot provide you with a contract to use.
Here is an excellent guide for Child Care Contracts as you think about what you want to include in your contact.
Here are some free sample contracts you can use:
Finally, you should document everything. Keep copies of all the employment records, tax filings, and paystubs. If things ever go wrong, you want to show that you followed all of the rules.