As a parent, you have a lot of demands on your time. Between working a full-time job, shuttling kids back and forth to various school functions and after-school activities, and trying to keep your household running smoothly, it's amazing that parents don't go insane. While companies like Bright Horizons (NASDAQ:BFAM) market child care to employers to offer as employee benefits, you may not be lucky enough to get those benefits. The idea of hiring someone to help you take care of your kids and give you some time to yourself can be extremely appealing, especially after a few months or years of raising your infant child on your own.

Whether you just hire someone to babysit your children on an occasional basis or find a professional live-in nanny to work for you full-time, there are a number of things you need to consider when you get someone to care for your kids. In particular, some of the tax issues involved with hiring child-care workers are easy to overlook, but they can get you into trouble if you aren't aware of them. Although the calculations are fairly simple, you'll want to make sure you're prepared so that you don't have any unpleasant surprises at tax time.

Understanding the nanny tax
The most important thing about the nanny tax? It doesn't just apply to nannies. If you paid someone $1,500 or more to provide babysitting or other child-care services during 2006, then you may have to deal with the nanny tax. There are a few exceptions: Most notably, if your babysitter is under age 18, you aren't subject to it. Also, you can pay many family members, including your own parents or children under age 21, without worrying about the tax.

The idea behind the nanny tax is that when you get someone to provide child care for your family, you are assuming the role of an employer. The nanny tax represents employment taxes that most employers have to pay on behalf of their employees.

Calculating the tax
There are actually several different taxes incorporated into the nanny tax. Depending on how much you pay your child care provider, you may have to pay taxes for Social Security, Medicare, and unemployment insurance. While you will definitely need to file a form and make payments to the IRS, you may also have to pay your state tax authority for state unemployment taxes.

In order to calculate your total tax, use Schedule H on your Form 1040. If you don't withhold your employee's share of these taxes from what you pay them, then you will generally have to pay a tax of 12.4% of your employee's total pay for Social Security tax and 2.9% for Medicare tax. If you didn't pay $1,000 or more during any calendar quarter to your child care provider, those are the only taxes you have to pay. On the other hand, if you did pay that much during at least one quarter of 2006, then you'll also have to pay unemployment tax. For federal purposes, if you pay your state unemployment taxes by April 15, then the unemployment tax is 0.8% on the first $7,000 of your employee's total pay.

In order to figure out how to pay the state's share of unemployment tax, you should contact your state's unemployment tax agency. The instructions for Schedule H give a list of phone numbers and web addresses for the appropriate agency in each state.

Employer reporting requirements
Once you've completed Schedule H and paid the appropriate tax, you're still not done. As an employer, you also have duties to your employee. Specifically, for any child-care provider to whom you pay more than $1,500 during the year, you have to complete and give your provider a copy of Form W-2 -- the same form you may receive from your own employer that reports your wages for the year. In addition, you'll also have to fill out Form W-3, which is a similar report that goes to the IRS rather than to your employee.

In order to complete these forms, you'll need to have an employer identification number or EIN. You can obtain an EIN directly from the IRS by using Form SS-4. There is an Internet version of this form that allows you to obtain an EIN almost instantaneously.

Managing the nanny tax
Depending on your child care needs, there are ways you can manage your nanny tax obligation. If you only need occasional babysitting, an easy way to avoid the nanny tax entirely is either to use babysitters under age 18, or to make sure you don't pay any one babysitter more than $1,500 during the year. If you use multiple babysitters , you may pay more than $1,500 in total, as long as you don't pay any one babysitter more than $1,500. Also, if you have a full-time nanny, consider withholding the employee share of Social Security and Medicare taxes from your nanny's pay. Finally, if you predict that you will owe a large nanny tax, you should make estimated payments throughout the year to avoid interest and penalties.

Paying taxes is never fun. However, ignoring the nanny tax can get you in big trouble. Complying with the law may save you a lot of hassle later on.

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Fool contributor Dan Caplinger paid his first babysitter last month. He doesn't own shares of Bright Horizons. The Fool's disclosure policy takes care of you.