When families hire a caregiver, their tax-related questions usually center on how much they'll have to pay and how much they'll withhold from their employee. That logic works fine generally in the commercial payroll world, but household employment has a few extra nuances, which is why speaking to a specialist is so important during the hiring process. With the prevalence of nannyshares and part-time caregivers, the following scenario could easily happen to one of your clients.
The Clark and Stevenson families set up a nannyshare to make in-home care more affordable. They each paid the nanny $26,000 per year, meaning her total annual income was $52,000. Both families understood they were separate employers and asked the nanny to complete Form W-4 for each of them so they could withhold income taxes from her payroll. The nanny was used to being paid legally, so she had no problem filling out the W-4. Payroll ran smoothly with the nanny and both families - until tax season this year.
When the nanny went online to file her personal income tax return, she entered both of the W-2s provided to her by the Clark and Stevenson families. She was expecting a small refund, but was shocked to see she owed an additional $1,800 to the IRS. The nanny approached both families frustrated, and accused them of not accurately calculating her tax withholdings. To make things right, she wanted the families to cover the additional taxes she owed.
Household employers are not explicitly required to withhold income taxes from their employee. However, most employers do to keep the employee from having to budget for the taxes on their own. To withhold federal income taxes, employees must fill out Form W-4 and provide it to their employer.
In most circumstances, employees only complete the Personal Allowances Worksheet in order to calculate the allowances they will choose, as the other worksheets are typically only completed if the employee has a complex income tax situation. The employer should withhold the employee's income taxes based on how they complete the form. They are not responsible for making sure the employee chooses the appropriate withholding election for their situation.
Note: The requirement to withhold state income taxes is the same. If an employer lives in a state with income taxes, the employee fills out a state withholding form and the employer withholds state income taxes based on their elections.
Neither family understood how their nanny's tax issues could have occurred. To help reach a solution, the nanny told the families to call HomePay because we had handled her payroll for a past employer with no problems. The Clark family called and one of our Consultants explained that since they were in a nannyshare and the total wages paid to their nanny were more than $50,000, she should not have used the basic Personal Allowances Worksheet on the W-4.
Instead, she should have used the Two-Earners / Multiple Jobs Worksheet. Because of this technicality, both families withheld her federal income taxes based on a $26,000 tax bracket instead of a $52,000 tax bracket.
Gross Pay $26,000.00 Gross Pay $26,000.00
Income Tax - $3,093.75 Income Tax - $3,093.75
Social Security - $1,612.00 Social Security - $1,612.00
Medicare - $377.00 Medicare - $377.00
Net Pay $20,917.75 Net Pay $20,917.75
If the nanny would have had her federal income taxes withheld at the $52,000 tax bracket, her tax withholdings would have looked like this:
Gross Pay $52,000.00
Income Tax - $8,218.75
Social Security - $3,224.00
Medicare - $754.00
Net Pay $39,803.25
As you can see, the difference in income taxes between the two scenarios is a little more than $2,000. The Consultant explained that the tax bill of about $1,800 was indeed accurate and the responsibility of the nanny to pay. However, since both families loved the work the nanny was doing and no one really knew what they had done was incorrect, they agreed to split the cost 3 ways. Both families also signed up as HomePay clients to make sure something like this never happened again.
A consultation like the one the Clark family received is something we recommend for all families to take advantage of. Unlike commercial payroll companies, HomePay experts can tailor payroll and tax advice to families in nannyshares or those with part-time caregivers who may have an additional job(s) on the side. This attention to detail keeps families and caregivers from having unpleasant conversations during tax season. Please let us know if we can ever assist one of your clients. We're here to ensure that they have an excellent employment experience - from paydays to tax time and all points in between.