Financial Answer Center

An alternative to a day care center or a family home is to have someone (a nanny) come into your home to care for your infant or child. This form of caregiving is usually the most expensive. You may be the nanny's sole source of income. However, the extra cost may be worth it. You'll save the extra time involved in dropping off and picking up your child, and the child will benefit from specialized attention, given in a familiar location. Many times, a nanny will also do light housekeeping and cooking, which can also be a big time-saver for working parents.

A nanny can also be the right answer if you have children in different age groups (you have an infant who needs constant attention and a seven-year-old who needs some supervision with homework after school). And a nanny that lives in your home can also offer you flexibility if you have unusual work hours.

The cost of a nanny varies, depending on whether the nanny lives with you or lives in their own house, the experience of the nanny, the hours worked, the age of your child, what you expect the nanny to do, and the region of the country in which you live. Predictably, costs are higher in the cities and on the coasts.

Employing a nanny can be as complicated as it is expensive. When you become an employer, you become a payroll and benefits department, you have to decide on salary and raises, and you may have to fire someone. You'll also need to address some insurance issues and you may have to contend with immigration rules.

When employing a nanny, plan for employment taxes. You'll have to pay federal and state unemployment tax, state workers' compensation and disability insurance, and your half (as the employer) of federal Social Security and Medicare tax for your nanny. There are also federal and if applicable, state income tax withholding requirements. The requirements are complex, and you may want to consult a tax professional to ensure you're complying, or at least do some research online. It is important. Also, most homeowner's policies will not insure the nanny while in your home since they are "employees" and not guests. Check with your insurance agent. You'll most likely need to purchase a "worker's compensation" rider or you might be required to pay into the state workers' compensation fund.