The Ins & Outs Of Hiring A Nanny
Childcare Expenses explained
Nanny expenses, daycare, summer camp nurseries are all deductible for parents. The tax deduction must be claimed by the parent in the lower tax bracket. That means the value of the deduction can vary significantly, from $0 to $3840 per kid.
If the child lives with you and is under 16, then the deduction is up to $8000 for each child under the age of 7 and up to $5000 for each child between the age of 7 and 16. This tax deduction lowers your net income on your tax return by the amount claimed.
The tax benefit is the largest when both parents work and are in relatively high tax brackets.
Hiring a Nanny
You can hire a nanny and deduct the cost from your taxable income. The nanny will become your employee and you must pay them like an official employee, and make payroll remittances each month. Here are the steps to hiring a nanny, once you have chosen the right person:
- Make sure you’re eligible for the tax benefit in the first place. There are many rules here, so feel free to talk to us about which ones apply to you.
- Collect the nanny’s information, including contact info and SIN #, and let them know how you will be paying them.
- Ensure both parties understand the rules and costs associated with this decision. An employment contract is prudent.
- Get a Business Number and open a Payroll Account with the CRA. This can be done online, but it’s best to do this with your accountant.
- Decide how you will do the payroll remittance calculation and payment. You can do it on your own with a payroll program or hire a bookkeeper/accountant to do it.
- At the end of the year, a T4 slip needs to be filed showing total paid to the nanny and total remitted.
What if the nanny wants to be paid under the table?
Some people choose to pay their nanny under the table to avoid payroll costs. By not doing things above board, the parents are not treating the nanny as an employee. Under employment law, nannies too are entitled to EI, CPP, vacation pay, overtime, sick leave and various other benefits.
Perhaps the nanny asks to be paid cash under the table so they don’t have to report the income. Even if they ask, you should think carefully about going this route. Whether they requested it or not, if you get audited and caught by the CRA on this, it could cost you big time. Depending on the circumstances, you could be on the hook for CPP, EI and withheld income taxes for the entire period of employment, with penalties and interest on top.
Other important facts
If both parents are in the highest tax bracket, they would save $3840 in tax for each kid in childcare under the age of 7, and $2400 for each kid in childcare between 7 and 16. That is the maximum value of the childcare deduction. With this said, it is only a tax benefit if both parents are earning income. Here are some other things to consider:
- The child must live with you and you must be working, going to school, or running a business
- The nanny cannot be a relative under the age of 18
- Amounts reimbursed by an employer do not qualify
- Boarding school and other camps for older children can qualify, but the child cannot make more than $12,000/year
- If the nanny lives with you, you can also deduct room and board
Have more questions about your childcare or nanny situation? We’d be happy to help you. We’re Chartered Professional Accountants (CPA’s) and are here to help you reach your business goals. We have extensive knowledge of the changing tax laws – including ones related to self-employed professionals like yourself. We provide bookkeeping and tax services to small business owners in Okotoks and Calgary, including everything from deductions, write offs, expenses, tax returns, GST filing and more.
True North Accounting
Image from Disney and Cameron Mackintosh's Mary Poppins Broadway Musical