The HomePay Blog

When things change, we're on it. If it concerns household employment,
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The No W-2 Dilemma

by Breedlove February 26, 2015

During tax season, we hear from many household employees who were paid under the table the previous year and now want help paying their taxes and reporting their income. Often they've just realized that taxes should have played a part in their compensation. But other times they're looking for advice because the family they work for doesn't wish to pay them on the books. This edition of The Legal Review shows what recourses employees have at their disposal and why families should not risk avoiding "nanny taxes."

The Situation
A nanny called explaining that she had worked the final four months of last year for a family and earned roughly $6,000. The family did not withhold taxes from the nanny and was not planning on reporting her wages. The nanny was concerned with the fact that she would not be provided a W-2 and wanted guidance on how to report her earnings at the end of the year.

The Law
IRS Publication 926 states that families who pay a household employee $1,900 or more in a calendar year must provide them with a W-2 so they can file their personal income tax return. The deadline for employers to provide an employee with their W-2 is January 31. Employees that do not receive a W-2 by February 14 may reach out to the IRS for help. The employee provides their personal information, an estimate of their earnings and their employer's information. The IRS then sends a notice to the employer to let them know of their requirement to issue a W-2.

If still unsuccessful, the employee may report their income using Form 4852, which is a substitute for the W-2. In addition to reporting her income and any taxes that were withheld, the employee must explain how she tried to obtain a W-2 from her employer. Filing Form 4852 significantly increases the chance that the employer will be audited by the IRS.

The Outcome
Once we explained to the nanny what she needed to do to try and obtain a W-2, she let the family know that she would be in contact with the IRS because filing taxes was important to her. The family, not wanting to risk an audit, contacted HomePay to assist with catching up on their taxes and getting their nanny a W-2. Since they were only a few months behind, we were quickly able to file the delinquent state tax returns and prepare the family's year-end documents - including the nanny's W-2. The family and the nanny will have no issue in filing their personal income tax returns before the April 15 deadline. And because the nanny handled the initial conversation so professionally with the family, she is still working with them.

Scenarios like this are not uncommon. We work with families year-round that need help catching up on their household employment taxes. So if you have a client who keeps putting off these important items, let them know we're here to help. Our service is quick, efficient and designed to meet the needs of busy families. We'll have them caught up in no time!

Happy 20th Birthday Schedule H

by Breedlove February 20, 2015

Household employers have a few very unique tax rules to follow. The best example of this is having to attach a Schedule H to your personal income tax return. This form is strictly for reconciling household employment taxes, so only those who have hired a nanny, senior caregiver, housekeeper or other domestic employee have to remember to fill it out during tax season. But it wasn’t always this way.

In October of 1994, President Bill Clinton signed the Social Security Domestic Employment Reform Act into law. This bill set the parameters for how “nanny taxes” are handled today on the federal level – including the requirement for these taxes to be reconciled on your personal income tax return. That means this tax filing season marks 20 years of families having a much easier method of reporting the wages they pay to their household employee and letting the IRS know what federal taxes they paid throughout the year.

Note: Your state has its own requirements for handling household employment taxes. Make sure you understand how unemployment insurance taxes and income taxes should be remitted throughout the year. Our state-specific nanny tax pages are a good place to start.

So as you’re gathering your tax-related documents and hoping for the best from Uncle Sam, don’t forget about the Schedule H. And whether you file your income tax return online or not, make sure the amount of household employment taxes on your Schedule H shows up on Line 60a of your 1040.

Budgeting for Around-the-Clock Care and Sleep Time

by Breedlove January 21, 2015

In the nanny and senior care world, it's common for families to need their caregiver to work long shifts from time to time. Whether it's watching the kids for a whole weekend while Mom and Dad are out of town or taking an around-the-clock shift as part of an eldercare team, payroll can get tricky when overnight shifts are involved.

The Situation

A family wanted to take a weekend vacation and offered their nanny an extra $300 to watch the kids while they were gone. They normally paid her $10 per hour and felt this was more than fair compensation for her work over the weekend. However, while cancelling plans with a friend, the nanny's friend told her she should receive overtime for working these additional hours. By her friend's calculation, the nanny would be working her normal 30 hours during the week and then an additional 48 hours over the weekend for a total of 78 hours. If she was paid 40 hours at her regular $10 per hour and 38 overtime hours at $15 per hour, she should be paid $970 for the week instead of $600. The nanny brought this up with the family who didn't know what to do.

The Law

The Fair Labor Standards Act (FLSA) states that overtime must be paid for any hour over 40 that a non-exempt employee works in a 7-day work period. The rate at which overtime must be paid is 1.5 times the employee's regular rate of pay. The Fair Labor Standards Act classifies household employees such as nannies and senior caregivers as non-exempt workers.

If an employee is required to be on duty for 24 hours or more, the FLSA permits a sleeping period of up to 8 hours to be excluded from hours worked. This exclusion applies if the employee is provided adequate sleeping facilities and is able to sleep for at least 5 consecutive hours uninterrupted by work-related duties.

NOTE: In California, the state Supreme Court recently ruled that the federal sleep time exemption is not permissible unless it is specifically stated in a Wage Order. Since sleep time is not addressed in Wage Order 15 (the Wage Order for household employees), California families cannot exclude sleep time for 24-hour shifts.

The Outcome

The family contacted HomePay to determine what their legal requirements were. A consultant explained they were not required to pay their nanny for up to 8 hours of sleep during her 2 overnight stays since she would have her own room and the kids generally slept through the night just fine. This meant they needed to pay their nanny for 40 regular hours and 22 overtime hours (excluding 16 hours for sleep time), for a total of $730 for the week. Even though it was still more than the $600 the family budgeted for, they understood the reasoning behind the law and were ultimately grateful they were able to resolve the situation before they left for the weekend.

What could have been an ugly overtime situation was prevented by the family contacting HomePay before they paid their nanny. We encourage families to contact us at any time if you have a question about payroll, taxes or labor law. We're here to help. And it's always easier to prevent mistakes than fix them.

What Families Need to Know About Companion Care

by Breedlove January 6, 2015

For several decades, home care “companions” have provided care to elderly individuals. The employers of these workers (whether privately employed by the family or employed by a third-party Home Care Agency) were not required to pay overtime (nor minimum wage in some states). This has been known as the “Companion Care Exemption” because these workers were exempt from federal wage and hour law as defined by the Fair Labor Standards Act (FLSA).

The effect of this exemption has been to keep wages low, thereby making overall care costs more affordable. However, worker advocacy groups have argued that many senior care workers live at or near the poverty level, despite working very long hours. As a result, the industry has frequently struggled to attract enough high-quality workers – a shortage that many experts predict will become more dramatic as our citizenry ages.

The DOL Announces Changes
In late 2013, the Department of Labor announced two changes. First, they said that the Companion Care Exemption would only apply in cases where the family is the direct employer. Therefore, all third-party workers (employed by a Home Care Agency) would be entitled to overtime effective January 1, 2015.

Second, the DOL narrowed the definition of “companion care.” It is now defined as service that is predominantly fellowship and protection in nature. If a worker is asked to keep the patient company (reading, watching TV, talking, playing games, strolling, etc.) and safe (make sure the gas on the stove is turned off, the heater is working, etc.), they can be classified as a companion – as long as less than 20% of the worker’s time is spent on ADLs (Activities of Daily Living such as bathing, dressing, meal preparation, light housekeeping, etc.).

The DOL Gets Challenged
The National Association of Home Care and Hospice (NACH) as well as the Home Care Association of America (HCAOA) challenged the Department of Labor, arguing that such a radical change would destabilize the industry and make care unaffordable for many elderly Americans. They asked U.S. District Judge Richard Leon to eliminate the DOL’s disparity between third-party employment and private employment as criteria for exemption and, secondarily, they asked the court to strike down the restricted definition of companionship services and reinstate the decades-old definition.

In late December, the court ruled that the DOL had overstepped their regulatory authority in this case. Despite pronouncing his opinion that caregivers should be entitled to overtime, the judge ruled that it was up to Congress, not the DOL or the judiciary. He thereby eliminated the requirement that third-party employers must pay overtime to all workers.

The Conclusion (For Now)
On January 14th, the judge ruled all provisions of the enhanced companion care exemption be vacated. This includes both the restrictions on third-party workers and the narrowed definition of "companion care," which essentially means all federal laws regarding companion care remain unchanged - for now. It is possible for the Department of Labor to appeal this decision, so continue to stay tuned as we will update you when information becomes available.

If you are hiring companion care or senior care, it's important to determine the kind of care and the amount of care your loved one needs. If your loved one is independent and only needs someone to help with fellowship and safety, a companion caregiver is likely the most affordable option for you. If your loved one needs more assistance and the schedule is going to require more than 40 hours each week, you should budget for overtime (1.5 times the regular rate of pay) or consider a team of caregivers in order to stay under the overtime threshold. 

If you have more questions about the rulings or your situation, please don’t hesitate to call us for a free personalized phone consultation. We’re here to help!

18 States and 3 Cities Raise Minimum Wage for the New Year

by Breedlove December 30, 2014

Throughout most of 2014, minimum wage has been a hot topic. It’s been 5 years since the federal minimum wage of $7.25 per hour was set and many people think of this rate as the applicable pay rate regardless of their employment situation. However, each state (and some municipalities) can allow a vote to set the minimum wage in their jurisdiction – and many have effective January 1, 2015. So if you live in an area where two minimum wage rates exist, the rule of thumb is you must pay your employee at the highest rate.

If you are a household employer in the following states or cities, please make sure you are paying your employee at least the new minimum wage by the first of the New Year so you stay in compliance with state and city laws.

States:

Arkansas: $7.50 per hour

Arizona: $8.05 per hour

Colorado: $8.23 per hour

Connecticut: $9.15 per hour

Florida: $8.05 per hour

Hawaii: $7.75 per hour

Massachusetts: $9.00 per hour

Maryland: $8.00 per hour

Missouri: $7.65 per hour

Montana: $8.05 per hour

Nebraska: $8.00 per hour

New Jersey: $8.38 per hour

New York: $8.75 per hour (takes effect Dec. 31st)

Oregon: $9.25 per hour

South Dakota: $8.50 per hour

Vermont: $9.15 per hour

Washington: $9.47 per hour

West Virginia: $8.00 per hour

Cities:

San Francisco: $11.05 per hour

San Diego: $9.75 per hour

San Jose: $10.30 per hour

Other states plan to increase their minimum wage during 2015. We’ll keep you updated on those changes, but you can always check your state’s requirements if you have questions.

Employer-Paid Health Insurance: Still Non-Taxable Compensation?

by Breedlove December 19, 2014

The Affordable Care Act has fundamentally changed the way household employees (nannies, senior caregivers, housekeepers, etc.) obtain and pay for health insurance. As a reminder, the individual mandate requires that everyone have a policy or pay a fine. If the employee pays for her own insurance, there's a good chance she will qualify for the federal health insurance subsidy since most domestic workers earn less than 400% of the federal poverty level (about $47,000 per year). As long as she has documented wages (i.e. Form W-2), she'll be able to defray a significant portion of her premium cost.

Another option is employer-paid health insurance. For years, many savvy household employers have included health insurance as part of their compensation package in order to capitalize on the tax advantages of employer-paid health insurance. However, recently a ruling from the IRS on the Affordable Care Act triggered a mild panic. The ruling said that effective January 1, 2014, ALL employer-paid health insurance contributions were taxable to both employer and employee unless the employer purchased the policy through SHOP (Small Business Health Options Program). Deeper in the ruling, there was another statement that seemed to indicate that employers with only one employee were exempt from this portion of healthcare reform.

Since the ruling was issued a few weeks ago, many families, caregivers, placement agencies and accountants/advisors have been talking about the SHOP requirement for non-taxability because of the potential 2014 tax liability. However, lost in all the discussion was the apparent exemption for employers with only one employee - obviously a very important distinction for household employers.

Since both of the statements from the ruling were in conflict with the newly-released 2015 IRS Publication 15-B, we worked with the IRS to make sure we had formal clarification. This edition of The Legal Review will share those findings and hopefully clear up all the confusion about the new health insurance law.

Taxable or Not Taxable?

We were able to get confirmation that there is indeed an exemption for employers with one employee and the IRS is now in the process of revising Publication 15-B. Therefore, families with only one employee can continue to contribute to their employee's health insurance policy and have it be considered non-taxable compensation - even if the policy was not purchased through SHOP.

Families that have 2 or more household employees (i.e. a nanny and a housekeeper) must purchase the policies through SHOP (at www.healthcare.gov/small-businesses) if they want their contributions to be non-taxable.

It's important to note that there is another tax break available when policies are purchased through SHOP. The Credit for Small Employer Health Insurance Premiums (Form 8941) provides a tax credit of up to 50% of every dollar contributed - as long as the family pays for at least half of the employee's premium, the average wage for all employees is less than $50,000 per year and the policy is purchased through SHOP.

The Bottom Line

Therefore, for all new employers who want to make insurance part of the compensation package, we're advising them to procure the policy(ies) through SHOP, even if they only plan to hire one person. That way, it will be treated as non-taxable compensation AND they can take advantage of the Credit for Small Employer Health Insurance Premiums.

For legacy clients who have been reimbursing an employee for her own health insurance policy, they don't have to worry about taxability unless they have 2 or more employees. If they're interested in transitioning to a SHOP policy to take advantage of the tax credit, we're happy to run the numbers to see if the tax savings are worth their time and effort. There are a couple of variables that determine the amount of savings so we'll need to have a quick conversation to give an accurate estimate.

If, for whatever reason, the family doesn't want to get involved with the employee's health insurance, she, of course, can simply buy a policy through the exchange and file for her federal subsidy.

Most new laws have some kinks in the beginning, but the Affordable Care Act may go down in history as the granddaddy of kink-filled legislation. But that's why we're here. When questions arise regarding tax, labor law or HR issues specific to the household employment world, feel free to reach out to us. If the laws or the regs aren't clear, we'll dig until we get an answer and then be prepared to guide families safely through all aspects of compliance.

Department of Labor Ramps Up Worker Misclassification Efforts

by Breedlove October 2, 2014

The most common mistake we see in the household employment industry is worker misclassification – families treating their household employee as an independent contractor by providing Form 1099 to them during tax filing season. In almost all cases, the IRS has ruled that domestic workers should be treated as employees and receive a W-2 to complete their personal income tax return.


Well now the Department of Labor (DOL) is taking notice and acting. Recently the DOL awarded $10.2 million to 19 states to improve the detection and enforcement of worker misclassification. The states are California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont and Wisconsin.

The government is stepping in because when nannies, senior caregivers, housekeepers, etc. continue to be “1099’d,” it takes away tax revenue – specifically revenue for federal and state unemployment insurance. Domestic workers that are misclassified don’t have access to this benefit and also pay more in Social Security & Medicare taxes. Aside from that, the family may be exposed to tax evasion charges if they are caught misclassifying their employee.

Use this news to help someone if you know they currently treat their employee as an independent contractor. Remind them that paying legally is cheaper than they think because tax breaks can offset a significant portion of their employer tax cost. There’s still time to get things corrected for the 2014 tax year.

If you’d like more information about worker misclassification, please visit the Answers section of our website or give us a call. We’re here to help!

What to Know About the Affordable Care Act Before Open Enrollment Begins

by Breedlove September 30, 2014

Lately we've been inundated with questions about health insurance - specifically relating to the Affordable Care Act because the 2015 open enrollment is coming up on November 15th. So to help clear up any confusion families may have, here is a simple Q&A that may help.

What is the Affordable Care Act?

The Patient Protection and Affordable Care Act, commonly referred to as the "Affordable Care Act" or "Obamacare," is a federal law aimed at reducing the overall cost of health care and decreasing the number of uninsured individuals living in the United States.

Is my employee required to have health insurance?

Yes, your employee - like all Americans - is subject to penalties if she does not have health insurance coverage. However, you are not responsible for making sure your employee has health insurance.

Am I required to offer health insurance to my employee(s)?

No, employers are not required to offer health insurance if they employ fewer than 50 workers. However, you are required to provide your current employee and, at the time of hire, any future employee with a notice about the Health Insurance Marketplace.

What is the Health Insurance Marketplace?

The Health Insurance Marketplace is the government-run health insurance exchange - a "one-stop shop" where individuals can compare and purchase health insurance policies. Open enrollment for the Marketplace opens on November 15th for coverage beginning January 1, 2015. Your employee will be able to purchase health insurance through the Marketplace until open enrollment ends on February 15, 2015.

How much will health insurance cost?

The cost of health insurance will vary depending on the state and the options your employee chooses (deductible, co-pay, etc.). After completing an application, your employee will be able to compare prices and coverage options for different health insurance policies. Depending on her income and family size, she may be eligible for a subsidy if she purchases her insurance policy through the Marketplace. However, she must have documented wages in order to get a discounted policy - meaning she must be paid legally. The Kaiser Family Foundation has a helpful Subsidy Calculator to estimate how much she'll save.

If I contribute to my employee's health insurance policy, will I be eligible for any tax breaks?

If you set up a health insurance policy for your employee through SHOP (Small Business Health Options Program) on the Marketplace and pay at least 50% of your employee's premiums, you may be able to take advantage of the Credit for Small Employer Health Insurance. To take this credit, you'll attach Form 8941 to your personal income tax return. The credit is up to 50% of the contribution you pay. For more information regarding the requirements for contributing to health insurance, please contact our office as SHOP is a relatively new program and the details may change.

We understand that many families are tackling this issue for the first time and may still have questions after reading this. Please don't hesitate to send them our way. Our tax experts are happy to help Monday through Friday from 8am to 6pm CST.

 

This Week is National Nanny Recognition Week

by Breedlove September 23, 2014

Any family with a nanny knows how valuable she is to their family’s stability. Well this week, take some time to show it. September 21st – 27th is National Nanny Recognition Week and it’s a perfect time to thank your nanny for all the hard work and effort she puts into caring for your children. Any gesture from the heart will do. Perhaps take her out to a special dinner or give her a gift certificate to spa or surprise her with a paid day off. You can even have your kids make and sign a card for her to let her know how much they enjoy spending time with her.

From all of us at HomePay, we also want to recognize all the families that utilize our services. Your commitment to professional pay is a year-round gift to your nanny whether your realize it or not. This is because you guarantee she’ll have all the benefits and protections she deserves as a professional (retirement income and insurance through Social Security & Medicare, unemployment benefits, etc.) when she needs them. We hope you enjoy treating your nanny to something special this week and that the rest of 2014 is a happy time for you both.

Why Form 941 Should not be Used for Household Employment Taxes

by Breedlove August 26, 2014

When it comes to taxes, the tiniest of details can be the difference between smooth sailing and a giant headache. With the back-to-school hiring rush in full swing, now is a great time to familiarize yourself with a few household employment details (also known as the "nanny taxes," although the payroll, tax and labor laws apply to all types of domestic workers employed by a family). This particular household employment case highlights how a family's personal income tax return became much more complicated after the wrong tax returns were filed.

The Mistake

The Richmond family hired a nanny last year and utilized a local CPA to handle their tax return filings. The CPA made all the family's quarterly state tax payments on their behalf and prepared their year-end documents, but also made quarterly federal tax payments for the family using Form 941.

The Law

The use of Form 941 is for remitting federal quarterly tax payments for commercial businesses. But household employers are not commercial businesses, and according to IRS Publication 926, they should make estimated tax payments using the federal 1040 Estimated Payment schedule. The only exceptions to this rule are if the family already owns a business as a sole proprietor or if they operate a for-profit farm. These estimated payments cover the Social Security & Medicare (FICA) and federal income taxes withheld from an employee as well as the employer's share of FICA and federal unemployment insurance taxes. The taxes are remitted to the IRS in mid-April, mid-June, mid-September and mid-January using Form 1040-ES.

The Mess

When the Richmond's CPA filed their personal income tax return and Schedule H this year, the IRS showed the family owed additional taxes coincidentally equaling the amount of the taxes they sent in on their 941 returns. The family contacted the IRS and an agent informed them of their error in using Form 941. Unfortunately, the Richmonds were already past the 1st quarter of 2014 when they spoke to the agent and their CPA had filed another Form 941 on their behalf.

The Outcome

The family ultimately had to file amended 941 returns for all of 2013 and the 1st quarter of 2014 with instructions to transfer those tax payments to their personal taxes using their Social Security number. This allowed the Richmonds to amend their 2013 personal income tax return and get on the 1040 Estimated Payment schedule for the rest of the 2014. While ultimately the family's CPA had all the family's payroll and tax information correct from the beginning, the mistake of filing a Form 941 instead of Form 1040-ES resulted in hours of additional work and a frustrated client.


Household employment is a highly-nuanced section of the tax code with numerous exceptions and exemptions that don't apply to commercial enterprises. The state and federal complexities, combined with the unique labor law obligations, can create risk for families and liability for their advisors. That's why we were created as a comprehensive "nanny tax" specialist. Founded in 1992, we provide families in all 50 states with an affordable, "no-work, no-worry" solution to household employment payroll, tax and HR obligations.

 

 



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