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How can I help my nanny build a tax-deferred retirement savings account?

There are some practical ways an employer can help their nanny build a tax-deferred savings account.

The SEP-IRA

Employers can set up a SEP-IRA for their nanny. The contributions are 100% funded by the employer. Sometimes employees will ask to 'defer' a raise and have the $50 or so a week contributed by the employer into the SEP-IRA on their behalf. This benefits the employer as there are no employment taxes due on those contributions. The nanny benefits because their total income is lower, reducing their income taxes. SEP-IRA contributions are 100% vested to the employee.

Contributions to a SEP can be made between 0% to 25% of compensation up to a maximum of $45,000 for 2007 ($44,000 for 2006).

The Traditional IRA

The easiest solution (albeit not the least expensive to the employer) is to make a contribution to a nanny's traditional IRA. If she does not already have an IRA established, this can be done at any brokerage firm or bank. We refer clients to Sterling Capital Management Group, Jack Hudson, at 877.260.3570.

When an employer makes a contribution to a nanny's traditional IRA, this is reported as additional income to the nanny, and Social Security and Medicare taxes are due on the amounts. Most employers 'gross-up' the contribution, meaning that a net $2000 contribution would add $2166 to the nanny's reported income and cost the employer $2330 to make after Social Security/Medicare taxes are accounted for. The nanny deducts the hypothetical $2000 contribution amount from her personal income tax return, deferring the taxation of the contribution.

The contribution limits to a traditional IRA are as follows:

After 2008, the contribution limit will be indexed and rise in increments of $500 depending upon the level of inflation.

The SIMPLE IRA

Employers who wish to make retirement savings contributions in excess of the annual IRA contribution limits and with employee participation may consider establishing a SIMPLE IRA. A SIMPLE IRA plan is a Savings Incentive Match PLan for Employees and, like a 401K, there is an employee contribution in the form of payroll deductions and an employer contribution. Employer contributions are established at account setup and are typically a dollar for dollar match of the nanny's contribution, up to 3% of the nanny's annual salary. Each employee is always 100% vested in (or, has ownership of) all money in her SIMPLE IRA.

The nanny's contribution to the SIMPLE IRA is subject to Social Security and Medicare taxes, but not to income taxes. The employer's matching contribution is tax free. The nanny's contribution to the SIMPLE IRA reduces her income subject to Federal and State income taxes on her W-2 and is separately reported on her W-2.

For More Information contact HomeWork Solutions, Inc.
at 1-800-NaniTax or e-mail and submit a question.