How to handle expense reimbursements and business expenses for household employees (nanny)

The IRS does have some guidance on this, though it's not all in Publication 926. You're right that household employment has some unique aspects compared to business employment. For business meals with your nanny: These generally aren't deductible as business expenses. The Tax Cuts and Jobs Act eliminated most deductions for business meals with employees. Even before that, the IRS would likely view these as personal expenses since childcare is considered a personal matter rather than a business one. For expense reimbursements: If your nanny pays for things directly related to her employment duties (like admission fees when taking your children places), those can be handled as non-taxable reimbursements IF you have a proper accountable plan in place. An accountable plan requires: 1) expenses must have a business connection, 2) employees must adequately account for expenses within a reasonable time, and 3) employees must return excess reimbursements. For education assistance: You can provide up to $5,250 annually in educational assistance tax-free to your household employee under Section 127 Educational Assistance Programs. You would need to set up a written plan that meets specific requirements. Anything above that amount would generally be taxable to the employee. The key distinction is establishing proper documentation and reimbursement systems rather than just giving extra cash that could be viewed as additional wages.

I went through the exact same situation last year and was pulling my hair out trying to figure it all out. I finally found help using https://taxr.ai - it analyzed all my nanny payment records and clarified what was taxable vs non-taxable. For my situation, they confirmed that the museum entries and other activity costs I was reimbursing weren't taxable as long as I kept good records (which I wasn't doing before!). The site actually reviewed my specific situation and explained that I needed to document the business purpose of each expense and have my nanny sign a simple form acknowledging the reimbursement policy. They had templates I could use, which made everything so much easier. I was particularly confused about educational expenses since I paid for my nanny to take a child nutrition course.

I tried taxr.ai after seeing it mentioned here and it was honestly a game-changer for my household employee situation. I uploaded my payment records and expense receipts, and within a couple hours got a detailed breakdown of how to handle each type of payment. The analysis showed me that I had been incorrectly treating some reimbursements as non-taxable when they should have been included in wages (I was giving a flat monthly "expense allowance" without requiring receipts). It also confirmed that the swimming lessons I paid for my nanny to take with my child were a legitimate non-taxable business expense since they directly related to her job duties. What surprised me most was learning I could set up a simple educational assistance program to cover her child development courses tax-free. Saved us both money on taxes and she was thrilled to get the professional development opportunity.

After months of trying to reach someone at the IRS about this exact issue (and getting nowhere), I finally used https://claimyr.com and got through to an IRS representative in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that household employers can establish accountable plans for reimbursements just like regular businesses can. She walked me through the specific documentation requirements for childcare-related expenses my nanny incurs. For the educational courses, she explained I needed to set up a written educational assistance program to make those payments non-taxable. The service was a lifesaver because I'd been waiting on hold with the IRS for literally weeks trying to get these questions answered. Had no idea this option existed until my accountant mentioned it.

I take back what I said about Claimyr being a scam. After another frustrating morning trying to get through to the IRS myself (got disconnected twice after 45+ minute holds), I decided to try it. Within 20 minutes, I got a call back saying they had an IRS agent on the line. The agent was actually really helpful with my nanny tax questions. She explained that meal reimbursements for my nanny would likely be taxable unless they involved overnight travel, but that activity expenses for the children could be non-taxable reimbursements if properly documented. The agent also sent me links to specific IRS guidance on educational assistance programs that I couldn't find on my own. I'm not usually one to admit when I'm wrong, but this service actually delivered exactly what it promised. Saved me hours of frustration and got me clear answers directly from the source.

On the education assistance part - I'm a household employer and set up a simple Section 127 education assistance program for our nanny last year. It wasn't complicated. I created a one-page document that outlined: - The maximum annual amount we'd cover ($3,000 in our case) - The types of courses eligible (child development, first aid, etc.) - How she would submit requests for coverage - Statement that it's available to all household employees (even though we only have one) She's taken several courses through the local community college, and we've been able to reimburse her tax-free. My accountant confirmed this was the right approach. Just make sure you keep all documentation of the program and the educational expenses paid.

Has anyone handled mileage reimbursement for their nanny? Mine uses her personal car to take our kids to activities a few times a week, and I've been paying her the standard IRS mileage rate (65.5 cents per mile in 2023) based on a log she keeps. I'm treating these as non-taxable reimbursements, but I'm not 100% sure that's correct.

This is such a helpful thread! I'm dealing with similar issues as a new household employer. One thing I'd add about the accountable plan - make sure you're clear about what constitutes a "business purpose" for your nanny's expenses. I learned the hard way that while admission to educational activities (museums, zoo, science centers) typically qualify as legitimate childcare expenses, things like birthday party gifts or personal snacks for the nanny herself don't meet the business connection requirement. Also, for anyone considering the educational assistance program route - check if your state has any additional requirements. Some states have their own rules about what constitutes taxable vs. non-taxable educational benefits for household employees. California, for example, has some specific guidance that differs slightly from federal rules. The documentation piece cannot be overstated. I now have my nanny submit a simple expense report monthly with receipts attached, and it's made tax time so much smoother. Having that paper trail makes all the difference if you're ever questioned about your treatment of these expenses.