Hire a Nanny or Send Your Child to Day Care?

Choosing whether to send your child to day care or hire a nanny is a tough decision to make -- both emotionally and financially. My husband and I recently struggled to decide which of these two care options would be best for our third child and for us.

For our first two children, we hired nannies to watch them. The arrangement was great because I worked from home and was able to eat lunch with my girls most days, and the nannies did a good job of keeping them occupied (and away from me) while I was writing. And financially, it made more sense to hire one person to care for our two kids than to pay for both girls to go to day care.

Our daughters are in school now, so our son is the only child in the family who needs daytime care. This time, we opted for day care because it costs us at least $100 a week less than employing a nanny and, in all honesty, it’s easier.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

If you recently had a child or are returning to the workforce and now need child care, here are the pros and cons of day care and nannies.

Day care

Pros. Selecting a day-care facility for your child can be just as difficult as finding a good nanny. But once you’ve found the right fit, day care is a breeze. My husband or I drop off my son and the center’s staff handle everything while we work. I don’t even have to pack a lunch or snacks for him; food is provided at the center. We can have weekly payments automatically deducted from our checking account. And it’s reliable. If his regular care provider is sick, there are others on staff to fill in.

Plus, you can offset some of the cost of day care with tax breaks. You can claim the child-care tax credit if you pay for care for children younger than 13 while you work. You can count up to $3,000 in qualifying child-care expenses for one child, or up to $6,000 for two or more children. The tax credit is worth a percentage of the amount spent on child care. The percentage ranges from 20% to 35%, depending on your adjusted gross income.

However, if your employer offers a dependent-care flexible spending account, that may be a better deal. You can set aside up to $5,000 a year to cover child-care costs for children younger than 13. The money you contribute to an FSA escapes income taxes and Social Security and Medicare taxes. You might be able to take advantage of both tax breaks. See Claiming the Child-Care Credit for more information.

Cons. Most facilities operate during normal daytime work hours. So if you work, say, from the afternoon into the night, day-care hours might not mesh with your work hours. If you have two or more children, then day care might cost more than paying the salary of one nanny to watch all of your kids. And germs are spread so easily among little kids at day care that you might have to frequently take off days from work to care for a sick child (and you’ll still have to pay for those days when he’s home).

Nanny

Pros. Your child doesn’t have to compete with several other children to get the caregiver’s attention. He can interact one-on-one with a nanny in the comfort of his own home, take naps in his own bed and play with his own toys that a multitude of other kids haven’t stuck in their mouths. If you work from home, you’ll have the opportunity to interact occasionally with your child during the day. And a nanny can offer flexible hours and accommodate parents who don’t have typical 9-to-5 work schedules.

Cons. Hiring a nanny is taxing -- literally. I can tell you from experience that dealing with the tax implications of employing a nanny is a pain. You must withhold and pay Social Security and Medicare taxes if you pay a household employee $1,800 or more a year. For 2013 you’ll pay the employer’s share of 7.65% of wages -- 6.2% for Social Security and 1.45% for Medicare --and you’ll withhold the same amount (the employee’s share) from your nanny’s paycheck.

You also have to pay a federal unemployment tax on the nanny’s first $7,000 of wages if you pay her $1,000 or more in any calendar quarter. Your state may levy an unemployment tax, as well. Check with your state’s labor department. The federal unemployment tax is 6%, but you may be able to get a credit of up to 5.4% by paying your state’s unemployment tax. Stephanie Breedlove, head of Care.com HomePay and founder of Breedlove and Associates, a nanny payroll service, says you can offset some of these household employee taxes by taking advantage of the child-care tax credit or a dependent-care FSA (see above)

To pay these so-called nanny taxes, there’s lots of paperwork involved. You must get an employer identification number by filling out a federal Form SS-4 or applying online at IRS.gov. You must also fill out the appropriate form with your state to get an identification number. You must make quarterly estimated payments to cover your extra tax liability (or adjust your tax withholding from your paycheck). You’ll file a Schedule H with your federal tax return in the spring to report household employment taxes. You’re not required to withhold federal income taxes from your nanny’s paycheck, but you can if the nanny asks and you agree. If so, complete a Form W-2, “Wage and Tax Statement,” and a Form W-3, “Transmittal of Wage and Tax Statements.” To avoid hassles, you can pay for a nanny payroll service such as Care.com HomePay, which Breedlove says charges $175 a quarter.