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Nanny tax

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The combination of payroll taxes withheld from a household employee and the employment taxes paid by their employer are commonly referred to as the nanny tax.[1] Under current law, any family or individual that pays a household employee more than $1,900 a year must withhold and pay Social Security and Medicare taxes, also known as FICA.[2]

There is evidence of widespread noncompliance with this tax.[3] The nanny tax received considerable attention in 1993 during Nannygate, when Zoë Baird, Bill Clinton’s nominee for United States Attorney General, was forced to withdraw after revelations surfaced that she had employed illegal aliens as a nanny and a chauffeur and failed to pay employment taxes.[4]

Eligibility

All domestic workers, such as cooks, nannies, housekeepers and gardeners, are subject to the nanny tax.[5] A taxpayer is required to pay the nanny tax if he or she pays cash wages of $1,900 or more to any one household employee. The threshold jumped from $1,800 in 2014.[6]

Federal unemployment insurance taxes must also be paid if the household pays any number of employees a total of $1,000 or more in a calendar quarter.[7]

State unemployment insurance taxes usually have the same requirement, but California ($750),[8] New York ($500),[9] and Washington, D.C. ($500)[10] have lower thresholds.

The IRS does not allow a household employer to classify a domestic worker as an independent contractor when the employer sets the hours and duties. The nanny tax can be legally avoided by hiring someone through an agency that carries the nanny or employee on its books as an employee, but it’s rare to find an agency that offers this benefit.[11]

Parents that hire babysitters for their children are also required to pay the nanny tax if they exceed the $1,900 wage threshold for any one sitter. For example, the going rate for babysitting in New York is $18 to $20 per hour, so only 90 hours of babysitting a year, perhaps two evenings a month, could potentially trigger the requirement to pay employment taxes for a sitter.[12]

Requirements

Six steps are required to comply with nanny tax laws in most states:

1) Establish tax accounts with the Internal Revenue Service and state tax agencies to establish yourself as an employer and obtain an Employer Identification Number (EIN).

2) Withhold Social Security and Medicare taxes from each paycheck. Household employers are not required to withhold federal and state income taxes from their employee, but it is recommended so the employee does not have to pay these taxes on their own.

3) On a quarterly basis, file state unemployment insurance and state income tax returns and remit the appropriate payments to the state and the IRS.

4) Four times per year, remit the employee and employer’s share of Social Security and Medicare taxes, federal income taxes withheld from the employee and federal unemployment taxes to the IRS via Form 1040-ES.

5) In January, provide a Form W-2 to the employee and file a W-2 Copy A and W-3 with the Social Security Administration.

6) Attach a Schedule H with your personal income tax return (Form 1040) to summarize the FICA taxes and federal income taxes withheld from your employee and the FICA and federal unemployment insurance taxes paid by you as the employer.[13]

Employees of household workers can also offer certain benefits such as parking, public transportation, college tuition and health insurance as non-taxable compensation.[14]

Tax Breaks

There are two tax breaks for child care costs: the child and dependent care credit and a pre-tax flexible spending account through your employer. The credit can be claimed by attaching Form 2441 to your personal income tax return and can decrease your tax bill by up to $600 for one dependent and $1,200 for two or more dependents. With an FSA, you can set aside up to $5,000 in pre-tax earnings to pay for child care for kids under 13.[15]

Tax breaks associated with the nanny tax are detailed in IRS Publication 503, Child and Dependent Care Expenses.[16]

Nanny Tax Compliance

A survey produced by the Park Slope Parents revealed that 63 percent of respondents reported that they pay their nannies completely off the books and do not pay the nanny tax, 10 percent said they pay partly on and partly off the books, 15 percent said they pay completely on the books, and 12 percent refused to answer. 68 percent of the respondents who do pay on the books use a service or accountant to pay nanny taxes while 22 percent handle the accounting themselves.[17]

One of the main risks of noncompliance is that a former nanny may file for unemployment benefits. The state will check to see if the employer has been paying unemployment taxes and, when they find the employer has not been paying, may audit the employer and inform the IRS which could proceed with its own audit. The employer may end up owing back taxes, interest and penalties to multiple government agencies.[18]

Trends towards online hiring and short-term and part-time nanny employment have tended to reduce compliance with nanny tax laws in recent years.[19]

Public figures whose careers have been negatively impacted in recent years by controversies involving the nanny tax include Zoe Baird, Kimba Wood, Ron Brown, Federico Peña, Linda Chavez, Bernard Kerik, Jim Gibbons, Nancy Killefer and Meg Whitman.

References

  1. ^ Donna Fuscaldo, "Tax Rules of Hiring a Caregiver,” FOXBusiness, March 4, 2014.
  2. ^ Publication 926, Household Employer's Tax Guide, 2014, IRS.gov.
  3. ^ “The Park Slope Parents Nanny Compensation Survey,” 2013.
  4. ^ Michael Kelly, “Settling In: The President’s Day; Clinton Cancels Baird’s Nomination for Justice Department,” New York Times, January 22, 1993.
  5. ^ Bonnie Lee, “Nanny Taxes: What Parents Need to Know,” Fox Business, May 30, 2013.
  6. ^ Publication 926, Household Employer's Tax Guide, 2014, IRS.gov.
  7. ^ “Topic 756 - Employment Taxes for Household Employees,” IRS Tax Topics.
  8. ^ “California Tax Service Center publication”
  9. ^ Bonnie Lee, “Nanny Taxes: What Parents Need to Know,” Fox Business, May 30, 2013.
  10. ^ Publication 926, Household Employer's Tax Guide, 2014, IRS.gov.
  11. ^ Jacoba Urist, “Should You Be Paying Taxes on Your Baby Sitter?,” New York Times, April 14, 2013.
  12. ^ Jacoba Urist, “Should You Be Paying Taxes on Your Baby Sitter?,” New York Times, April 14, 2013.
  13. ^ Jermaine Taylor. “Nanny Tax: Pitfalls and Need-to-Knows for Your Taxes,” CNBC.com, March 21, 2013.
  14. ^ Stephanie Breedlove, “The Nanny Deadlines,” Accounting Today, February 11, 2014.
  15. ^ Tara Siegel Bernard, "Choosing Child Care When You Go Back to Work," New York Times, November 22, 2013.
  16. ^ Ashlea Ebeling, “The ABCs Of Child Care Breaks,” Forbes, March 18, 2009.
  17. ^ “The Park Slope Parents Nanny Compensation Survey,” 2013.
  18. ^ Ron Lieber, “Doing the Right Thing by Paying the Nanny Tax,” New York Times, January 23, 2009.
  19. ^ Sue Shellenbarger, “Family Secret: More Parents Are Avoiding the Nanny Tax,” Wall Street Journal, November 5, 2008.

Category:Child care Category:Nanny Category:Household behavior and family economics

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