The article “Tax Facts When Hiring A Nanny” was originally published on MoneySense on June 20, 2017.
You have different obligations depending on if your nanny is your employee or is considered self-employed
Q: I have four children for whom I can claim child care expenses. I would like to hire someone to look after them who is retired and 71 years old.
1. She no longer needs to contribute to CPP, correct?
2. I don’t need to contribute for her as her employer, correct? Is the same correct for EI?
3. How will she be taxed on that income?
A: Child care can be costly. Given you have four kids who require care, I can imagine a nanny is probably a less expensive option for you than day care, Karina.
As you may know, you can deduct child care expenses, including a nanny, against your eligible employment or self-employment income. You can claim up to $8,000 for each child aged six or under, $5,000 for each child aged seven to 16 and $11,000 for each child who qualifies for the disability tax credit.
A 71-year old does not need to contribute to the Canada Pension Plan (CPP), nor do you have to make contributions on their behalf. CPP contributions are required by default for any salary paid to an employee who is age 18 to 70 unless they meet certain conditions. Therefore, a 71-year old is CPP exempt.
You may need to make certain other deductions and contributions on her behalf, Karina. When you pay someone for providing services for you, whether they are an employee or self-employed depends on the facts.
Factors to consider include:
– the level of control the payer has over the worker’s activities;
– whether the worker provides the tools and equipment;
– whether the worker can subcontract the work or hire assistants;
– the degree of financial risk the worker takes;
– the degree of responsibility for investment and management the worker holds;
– the worker’s opportunity for profit; and
– any other relevant factors, such as written contracts.
It may be difficult to substantiate an independent contractor relationship for a full-time caregiver for four children. There was a Tax Court case in 2011 whereby a part-time babysitter with no set hours or availability was determined to be self-employed under appeal, but a full-time caregiver for your children is likely an employee.
You need to withhold income tax and employment insurance (EI) premiums from a salary paid to an employee and pay employer matching contributions to EI. Employers must register a business number with the Canada Revenue Agency (CRA), make regular tax remittances and prepare a T4 slip for the employee by the end of February each year.
As far as how she will be taxed on that income, Karina, assuming you determine that she is an employee and you pay her a salary, she will report her T4 income and deductions on her tax return just like any other employee.
If you decide that she is self-employed, she would report her self-employment income and any eligible expenses accordingly.
Keep in mind it is up to you as the payer to determine whether your caregiver is an employee or self-employed. Even though someone may want to be considered self-employed because of actual or perceived tax benefits, you are the one who is on the hook for making that determination. And you may be on the hook for the tax deductions if you make the wrong determination, Karina.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.