The HomePay Blog

When things change, we're on it. If it concerns household employment,
you'll find it here.

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 contribute to your employee's health insurance premium, the amount of your contribution is considered "non-taxable compensation" - so neither you nor your employee would have any taxes on that portion of the compensation. In addition to the non-taxable advantage, 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.

 

 

Common NannyShare Mistake Disqualifies Family from Tax Breaks

by Breedlove July 17, 2014

NannyShare arrangements have become increasingly popular over the past couple of years. This is because it is significantly cheaper to share a nanny than to employ one alone and both families can capitalize on tax breaks if the nanny is paid legally by both families. But many times, only one family follows through with this commitment. This case is an example of the negative financial consequences of mismanaging the tax and payroll process in a NannyShare.

The Mistake

The Cole family and the Whitman family agreed to employ a nanny to care for their children at the same time. The families settled on a total salary of $32,000 for their nanny with the Coles paying the full $32,000 in wages and getting a reimbursement check from the Whitmans each bi-weekly pay period for their half of the wages. Additionally, after going online to calculate the employer taxes, the Coles estimated that the tax liability would be approximately $1,500 per family for the year. These costs were to be reimbursed at the end of each quarter.

The Law

In a NannyShare arrangement, the law views both families as separate household employers. In order to be compliant, each family must:

- Set up state and federal tax IDs

- Withhold the proper taxes from the nanny's pay

- Prepare and file federal and state employment tax returns and remit their portion of the employee and employer taxes (based on their portion of the wages)

- Provide a Form W-2 to their employee at the end of each calendar year

- File Forms W-3 and W-2 Copy A with the Social Security Administration each year

- Prepare and attach a Schedule H to their personal income tax return

While it seems more convenient to let one family handle everything, this practice is illegal. It also disqualifies the other family - in this case the Whitmans - from taking advantage of the dependent care tax breaks.  

The Outcome

The Coles managed the payroll process on their own and then gave all the paperwork to their CPA at the end of the year. The CPA charged a total of $1,900, which was split between the two families. All told, each family had invested $18,450 into the employment of the nanny. The Coles presented their payroll and tax filing receipts to the husband's HR department and their CPA. They were very pleased to get a tax break totaling $2,500.

The Whitmans also pursued their tax break, but they were denied the $2,500 savings since they had not met all the requirements of the state and federal tax process. Mrs. Whitman's HR department was forced to reject the family's receipts because there was no proof that they paid legally. Aside from losing out on the tax breaks, the Whitmans took on unnecessary risk because any potential wage dispute or unemployment claim filed by the nanny would name the family as an employer. The state - and possibly the IRS - would pursue back taxes, penalties and interest from the family for failing to file the appropriate tax returns.

Domestic Workers Bill of Rights Signed in Massachusetts

by Breedlove June 30, 2014

Following in the footsteps of the states of New York, Hawaii and California, the state of Massachusetts has passed Domestic Workers Bill of Rights legislation that was signed by Governor Deval Patrick into law last Thursday, June 26th. The legislation, spearheaded by the National Domestic Workers Alliance, provides several new labor protections for nannies, senior caregivers, housekeepers and other household employees. While the law will not take effect until April 1, 2015, families need to be aware of the following new requirements:

1. Employees must have at least 24 consecutive hours of rest in each calendar week if they work 40 or more hours per week. If the employee agrees to work on their day of rest, they must be paid overtime (1.5 times the regular hourly rate) for each hour they work that day.

2. A household employee is allowed to take up to 8 weeks of maternity leave if she has worked full-time for the previous 3 months. The maternity leave does not have to be paid, but the family must hold the employee’s job if she decides to return to work.

3. Meals and lodging cannot be deducted from an employee’s wages without their prior written consent.

4. If the employee is a live-in and the family terminates her employment without cause, the family must give written notice and allow the employee to either; 1) Continue living in their home for at least 30 days, 2) Pay for comparable off-site housing, or 3) Give 2 weeks of severance pay to the employee. If the employee is terminated for cause, the family has no housing or severance obligations.

5. A written evaluation of the employee’s work performance must be given after 3 months of employment and annually moving forward if the employee requests it.

6. If the employee works 16 hours or more a week, the family must provide a contract that includes the following information: 
- The rate of pay, including overtime and any additional compensation
- Working hours, including meal breaks and other time off
- Provisions for days of rest, sick days, vacation days, personal days and holidays and whether those days are paid or unpaid
- Information about severance and if transportation costs or health insurance are paid for or reimbursed

If you have any questions about any provisions in the Massachusetts Domestic Workers Bill of Rights and how it may affect your specific employment situation, please call our office at 888-273-3356. We’re here to help.

Being Paid Under the Table Can Delay Retirement

by Breedlove May 23, 2014

When a nanny, housekeeper or senior caregiver is paid legally, they are entitled to certain benefits that are earned through the payroll and tax process. But because many household employees are younger in age, sometimes they don't realize how important these benefits are. In this edition of The Legal Review, the Hanson family finds themselves in a big mess after their long-time nanny decides she's ready to stop working.  

 

The Situation

 

The Hanson family lives in upstate New York and has employed a nanny named Bonnie for the past four years. Unlike most nannies, Bonnie was 60 years old when the Hansons hired her, but had a wealth of experience with childcare as she was a stay-at-home mom for most of her life. Before working for the Hansons, the only job Bonnie ever had was working in a local retail shop for 8 years. With her upbeat personality and her love for children, she was a great fit for the Hansons after their first child was born and they were ecstatic to hear she would take on the challenge of a second child two years later.

 

The Mistake

 

When the Hansons first hired Bonnie, they asked their neighbors how they handled hiring a nanny for their kids. The Hanson's neighbors explained they paid their nanny like they would a babysitter and gave her cash at the end of each week. Bonnie agreed with this arrangement and she was paid in cash every Friday for four years.   

 

The Law

 

When a family hires a household employee to work in their home, they are required to withhold Social Security & Medicare (FICA) taxes from their employee's pay each pay period. Federal and state income taxes - while not explicitly required to be withheld - should be deducted as well to ensure the employee does not get stuck with a large tax bill during tax season.

 

The family is also required to pay a matching portion of FICA taxes, as well as federal and state unemployment insurance taxes. Some states, like New York, also require additional taxes to either be withheld from an employee or paid by an employer. Please visit our state-specific pages for details on the taxes in your state.

 

At the end of the year, the family is required to prepare a W-2 for their employee so they can file their personal income tax return. The family is also required to file Form W-2 Copy A and Form W-3 with the Social Security Administration and prepare a Schedule H to attach to their personal income tax return.

 

The Mess

 

After four years of working for the Hansons, Bonnie was 64 and nearing the age for retirement. In trying to prepare for this exciting time, she enlisted the help of a local CPA to gauge what her benefits would be so she could budget for the next chapter of her life. Unfortunately, when the CPA learned Bonnie had no employment records for the previous four years, he had to be the bearer of bad news and told her she was ineligible for Social Security benefits. This is because the Social Security Administration (SSA) requires a minimum of 40 credits (or 10 years of work) to be accrued before a person can earn retirement benefits - and Bonnie could only prove she had eight years in retail.

 

Bonnie was confused and asked the CPA how she could get credit for the last four years of her working career so she could retire at the end of the year. The CPA explained that the Hanson family would need to catch up on four years' worth of payroll reporting and tax returns in order for the SSA to approve Social Security benefits for her. With this information in hand, Bonnie approached the Hansons, who were understandably embarrassed and guilt-ridden at the thought of their long-time nanny not being able to retire on her schedule. 

 

The Outcome

 

The Hansons wanted to help Bonnie in any way they could. After four years working in their home, she was a valued member of their household and a grandmotherly figure to their children. The CPA Bonnie consulted with happened to have a couple of clients with household employees and told the Hansons to contact Breedlove & Associates about the late tax returns. While he knew the steps they needed to take to make everything right for them and Bonnie, he wasn't interested in taking on four years' worth of payroll and taxes.

 

The Hansons called Breedlove & Associates the next day and we were able to get them caught up on their employer taxes. We set them up as household employers with the IRS and the state of New York, gathered the four years' worth of payroll information for Bonnie, filed the late tax returns, and best of all, sent tax information for the family and Bonnie to the Social Security Administration so Bonnie could get the working credits she needed for retirement. The family unfortunately incurred thousands of dollars in back tax payments and interest, but we were able to get the state of New York to waive the majority of the penalties they assessed. Bonnie will turn 65 in November and she's now set up to retire just in time for the holiday season. 

 

How the Whole Thing Could Have Been Avoided

 

If the Hansons had verified what their neighbor said via an accountant or even a simple Google search, they would have realized paying Bonnie in cash was not the right course of action. When families become household employers for the first time, they often have a laundry list of questions. It's important that they are steered toward a resource that can set them up for success. We're always available for your clients when they need this initial consultation and it's free for them to call. Sometimes a ten minute conversation can save a family like the Hansons thousands of dollars.

Paying on a Net Basis is not as Convenient as You Think

by Breedlove April 23, 2014

The Whitaker family was a few months removed from the birth of their first child when Mrs. Whitaker decided she wanted to return to work. The family weighed their childcare options and determined a nanny would be the best fit for their new daughter. Even though they were first-time household employers, Mr. Whitaker felt comfortable handling the hiring and employment process without the aid of an agency or a tax professional.

The Mistake

After interviewing several candidates, the Whitakers found a nanny they really liked who had experience working with young children and lived within 10 minutes of their Massachusetts home. When it came time to discuss her pay and how taxes would work, the nanny mentioned she had never had taxes withheld before and was used to taking home a certain amount of money each week. Not wanting to let a minor detail result in losing their favorite candidate, the family hired the nanny after agreeing to pay her $500 per week on a Net Pay basis. The Whitakers didn't really understand what that meant financially or administratively, but figured since they were hiring the nanny in October, they could figure everything out when it was time to file their personal taxes.

The Law

Payroll is calculated, tracked and reported to the IRS and state tax agencies on a Gross Pay basis (before taxes). In the eyes of the law, there is no such thing as a Net Pay compensation agreement.

Instead, families should negotiate a household employee's pay in terms of gross wages and then withhold the following taxes:

-
Social Security tax - 6.2% of gross wages
- Medicare tax - 1.45% of gross wages
- Federal income taxes - determined by the employee's allowances on Form W-4
- State income taxes - determined by the employee's selections on their state withholding form
* Only applicable if the family lives in a state with income taxes


Employees fill out Form W-4 and their state withholding form to elect the withholding status that most accurately reflects their life situation. This allows them to pre-pay income taxes each pay period at a rate that will approximately cover their end-of-year income tax liability. It is the employee's obligation to make the appropriate elections on Form W-4 and weigh the other factors that might influence their tax liability (i.e. other income, investment dividends, deductions, tax credits, etc.).

If an employee's elections cause taxes to be under-withheld, they have to make a tax payment at year-end. On the other hand, if their taxes were over-withheld, they will get a tax refund at year-end. Either way, it has no impact whatsoever on the employer because their obligation is simply to withhold the appropriate amount of taxes from their employee's gross pay.

The Mess

The income tax withholding process is based on tax tables set by the IRS and the state - and they change every year. This makes working backwards from Net Pay to Gross Pay (also called "grossing up") a potential administrative nightmare for families and extremely prone to error.

 

When it came time for the Whitakers to file their nanny taxes for the first time - and file their personal income taxes - they discovered their willingness to gross up for their nanny's taxes actually caused them to pay more than they should.

 

The nanny elected to choose Single with 0 Allowances on her federal W-4. This election meant her gross wages were reported by the Whitakers as $668 per week in order to give her the $500 take-home pay she requested. Additionally, the family's employer taxes totaled $61 per week, making the total cost (before tax breaks) $729 per week for the 12 weeks of the calendar year the nanny worked for them.

 

However, since the Whitaker's nanny was single and had no children, the federal W-4 worksheet recommends she claim Single with 2 Allowances to better fit her life situation. If the nanny had filled the W-4 out this way, the Whitakers would only have reported $637 per week in gross wages to get the nanny to take home $500. The employer taxes in this case would be another $58 per week - taking the family's total cost (before tax breaks) down to $695 each week.

 

This $34 weekly difference amounted to $408 over the course of three months and would be $1,768 in additional taxes if applied to a full year.

 

The Whitakers were happy to pay this additional amount thinking they were helping the nanny cover her tax obligation. However, when the nanny filed her tax return, she got a large refund because, at Single with 0 allowances, the IRS determined she had too much in income taxes "withheld" from her pay. The family was confused and felt that since they covered her income taxes, they should be entitled to some or all of the nanny's tax refund.

 

A neighbor of the Whitakers suggested they call Breedlove & Associates for advice because we handled their household employment taxes. When the family called, we explained the inherent issues with grossing up a net pay. Not wanting to run into this situation again, the family signed up for our service. Unfortunately, when we reviewed their tax returns, we found numerous errors in their "gross up" calculations due to changing tax tables during the year. This led to miscalculations which required us to amend each return they filed.

The Outcome
Once they understood the situation, the Whitakers felt that the nanny had taken advantage of their generosity. They had agreed to cover her taxes, but they did not agree to overpay her taxes so she could get a large bonus at the end of the year. The family strongly hinted to the nanny that the tax refund money belonged to them, but the nanny did not take the hint and never offered to reimburse them. This caused friction and distrust between the two parties and led to the nanny's termination within the next three months.

How the Whole Thing Could Have Been Avoided
A little knowledge by all parties at the beginning of the relationship would have prevented all the mistakes and distrust. Knowing what they know now, the Whitakers understand to always offer a gross wage to any future nanny. Breedlove & Associates has an Employee Paycheck Calculator that can be easily utilized to convert a Net Pay to a Gross Wage. Little details like this can help you steer clear of financial and legal issues that could potentially make or break an employment relationship. And if you run across something out of the ordinary, just give us a call. Timely professional advice can save thousands of dollars and dozens of hours of tedious work for busy families.

Celebrate National Nanny Training Day Early with Breedlove

by Breedlove April 8, 2014

National Nanny Training Day 2014 is this Saturday, April 12th. It’s a great opportunity for caregivers who want to get the most out of their job by learning new skills to improve their quality of care. Thousands of professionals will participate in 37 events across 19 states (and Washington, D.C.) hosted by local nanny agencies.

This year, our very own Stephanie Breedlove will be participating in a pre-National Nanny Training Day Google Hangout on Thursday, April 10th from 9am to 10am CST to answer any questions you may have. Stephanie will be part of a panel of experts that includes Kathy Dupuy with Mom’s Best Friend, Lora Brawley with Nanny Biz Reviews, Katie Bugbee with Care.com and Kellie Geres with Regarding Nannies.

The Hangout will be broadcast live, so don’t miss your chance to have your questions answered by five of the most respected women in the industry. To RSVP and access the event, visit https://plus.google.com/events/c65mpalchsk873s12ffe3flue4k.

We look forward to seeing you all there!

New Requirement for Sick Leave Begins for New York City Families

by Breedlove April 1, 2014

Effective today, April 1, 2014, household employers in New York City will be required to provide their employee with 2 paid days of sick leave per calendar year after one full year of service. This is in addition to the 3 paid days off required by the New York Domestic Workers’ Bill of Rights. Many families already provide this benefit as a part of their employment arrangement, but for those that don’t, please keep this mandate in mind if you’ve had a nanny, senior caregiver or other household employee working for you.

New York City isn’t the only city where household employers are required to provide sick leave. Families living in San Francisco, Jersey City, Portland and Washington, D.C. have to comply with versions of this law as well – and families in Newark, New Jersey will join this list effective May 29. If you need to know the specifics of any payroll, tax or labor law in your area, please visit our state-specific pages.



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