The articles below, reprinted from Best Nanny Newsletter, provide useful nanny tax information for parents.
One of the advantages of working with our agency is that handling payroll, withholding, and reporting are all included in our services. As part of the nation’s largest legal employer of nannies, our scale and experience allow us to effectively & efficiently take on the responsibility of legally employing your nanny. Learn more about how College Nannies manages taxes here.
There is a fairly commonmisperception that families can classify a domestic worker as an independent contractor if they want to. Thanks to misinformation floating around on the Internet — and sometimes even bad advice from a general tax professional — some families are misled into thinking they can “just give her a 1099.” (Form 1099 is the form business use to report wages paid to an independent contractor).
The IRS has ruled definitively that nannies and most other domestic workers should be classified as employees. Misclassifying them as independent contractors is considered tax evasion and offenders are saddled with back taxes, penalties, and interest. If caught, it is an extremely expensive mistake for families. Being classified as an independent contractor is not only illegal, it’s financially bad for the nanny. That’s because independent contractors are required by law to pay for both halves of the FICA taxes (social security and medicare).
n 2011, the employee portion of FICA is 5.65% of gross wages (it’s normally 7.65%, but there is a temporary deduction to help stimulate the economy). The employer portion of FICA is 7.65%. Having to pay the additional employer FICA tax burden can break the bank for many nannies. (For someone earning $30,000 per year, being misclassified as an independent contractor would cost her $2,295 per year in additional taxes).
If you’re a nanny making more than $1,700 in the 2011 calendar year from a particular family, the family should provide you with a Form W-2. If they give you a Form 1099, you’re being misclassified — and it’s costing you money. Don’t let yourself get “1099-ed!” Make sure the family understands the risk they’re taking — and the additional tax burden being placed on you.
This week we are discussing common nanny tax dilemmas. Yesterday, Tom Breedlove of Breedlove & Associates explained the common misperception that families can classify a domestic worker as self employed (an independent contractor). He explained that the IRS has ruled definitively that nannies and most other domestic workers must be classified as employees. Click here to see that article.
Another common mistake parents make is paying their nanny on their company payroll. This happens when bookkeepers and general/business tax accountants don’t understand the nuances of household employment law.
If a parent owns a company, they will need to manage their household employee’s payroll separate from that of their company’s employees. The logic is that businesses are allowed to take tax deductions on their business payroll expense. The IRS does not view nannies and other household employees to be direct contributors to the success of the business enterprise. Therefore, these wages cannot be reported on a business tax return and any tax deductions taken on these wages are illegal.
Instead of paying a nanny through the company payroll and taking a business tax deduction, families should pay her through their personal bank account and take a personal tax deduction on their federal income tax return.
In addition to the incorrect reporting and illegal tax deduction issues, there are related problems with group health insurance. Insurance providers generally do not allow personal employees to be included on a company policy. As a result, it may result in denied claims and, in extreme cases, insurance fraud.