Monday, May 11, 2009

Money Saver Monday: FSAs for childcare AND paying "over the table"

After the cribs, carseats, clothes, diapers, and hospital bills come the real expenses of parenthood - and these add up! I'm taking 6-weeks off of work and then working from home for 6-months which means we need childcare for the boys. We looked at local daycares (both daycare centers and family daycare) and were blown away by the pricetag (varying from $1,000-$1,900 per child). In-home care (nannys) are running between $14 and $20 in the city now - sometimes more for nannys with lots of twin experience. Luckily, we found an awesome girl to help us 10 hours a week starting at $14/hour.

So, how to save when money is flying out the window on an hourly basis? Introducing: Flexible Spending Accounts (FSAs). I'm sure people also pay "under the table" to negate taxes, but we don't want to gamble with this option - heck, I might run for Pres one day! Or maybe not.

Paying "over the table" - taxes:
Technically, you need to report and pay social security and Medicare taxes for any "household" employee who you're paying more than $1,700/year and must pay 15.3% of cash wages - the employee typically pays 7.65% and you pay 7.65%. Steps to pay are:
  1. Get an employer identification number (EIN)
  2. Withold social security, Medicare, and federal income taxes
  3. Send Copy A of form W-2 to the Social Security Administration (SSA)
  4. File Schedule H (form 1040) with annual returns
  5. File FUTA taxes on form 940
Here's the math:
  • $14 x 10 = $140 per week
  • $140 x 46 weeks = $6,440 per year
Nannys share of taxes
  • Social security: $6,440 x 6.2% = $399.28
  • Medicare tax: $6,440 x 1.45% = $93.38
Our share of taxes
  • Social security: $6,440 x 6.2% = $399.28
  • Medicare tax: $6,440 x 1.45% = $93.38
  • FUTA tax: $6,440 x 6.0% = $386.40
Amount reportes on W-2 and W-3 (NOTE: we're likely going to cover the taxes and not make nanny withold them, so we'll need to double the payments listed below for social security and medicare)
  • Wages and tips:$6,440
  • Social security: $399.28
  • Medicare: $93.38
  • FUTA: $386.40 (remains the same - no doubling because nanny doesn't pay this, too)
Since we're paying all the tax, our total tax paments for nanny for the year will be $1,171.72. We don't want to get hit come April, 2010, so I'm going to pay $55.79 to the federal government per pay period (every other week) to cover the total.

Flexible Spending Account (FSAs):
My employer is rad in that they offer an FSA through our insurance. This means I can pay the nanny up to $5,000/year with pre-tax dollars. In order to do this I need to:
  1. Claim $5,000/year FSA daycare during open enrollment
  2. Pay $208.00/month into the FSA
  3. Pay the nanny her regular salary (with built in taxes)
  4. Submit expense checks to HR every 30-days for the amount paid nanny
Here's a handy calculator for figuring out how much to withold for FSA/year.

Well, my head is spinning with numbers! Off to decorate the boys' room - much more fun than taxes. :o)

p.s. Rye - I don't know how you do this all day! You amaze me.

No comments: