August 13, 2013
It may seem like summer vacation began a couple of weeks ago, but back-to-school season is here and many parents are getting a head start on their nanny hiring process. Here at Breedlove & Associates, we want to arm you with all the information you’ll need to budget correctly and make the right tax and payroll decisions.
The first thing to understand is that the IRS considers nannies, senior caregivers, housekeepers, etc. to be employees of the families for whom they work. Some families make the mistake of misclassifying these workers as independent contractors (by providing them with a Form 1099 at the end of the year). This legal error can be very expensive for both parties – the employer is exposed to tax evasion charges and large IRS penalties while the employee has a higher tax rate and fewer benefits. Instead, families should report wages paid to their employee using Schedule H and provide her with Form W-2 at year-end.
You may be wondering how much to budget for employer taxes. The good news is, thanks to tax breaks, it’s probably much less than you think. The employer taxes fund benefits for the employee (i.e. Social Security, Medicare, Unemployment) and average about 9% of the gross wages. The childcare tax breaks can offset most of that 9% cost – some families even come out ahead. There are several factors that will affect your individual employer budget. Use our free Nanny Tax Calculator for a quick estimate. Most people are pleasantly surprised.
Finally, there’s quite a bit of confusion surrounding the terms “gross wages” and “net pay.” Gross wages refers to the amount paid to an employee before her taxes have been withheld. The government requires that all compensation be reported in terms of gross wages. Net pay (a.k.a. “take-home pay”) is the amount the employee gets each payday after taxes have been withheld. When discussing compensation with a prospective employee, we strongly encourage families to use gross wages. If you want to help an employee understand what her net pay will be, feel free to run scenarios with her using our Employee Paycheck Calculator or print out sample paystubs.
Hopefully, these tips and tools will be helpful. If you have questions, please don’t hesitate to give us a quick call at Toll Free 1-888-273-3356. We’re here to help.
February 8, 2013
Now that the IRS is processing personal income tax returns, many people are getting their tax documents in order and preparing for a (hopefully) big tax refund. But there are also many of you who may be stuck because you haven’t received your Form W-2 from your employer yet. So, what do you do?
The best thing to do is ask your employer. They’re supposed to send you your W-2 by January 31. The IRS says if they sent it by mail, it could take up to two weeks, so there’s a chance it could still be in transit.
However, if your employer says they never prepared one for you (or they provide you with a Form 1099 instead), you should remind them that you are considered a household employee and are required to have a Form W-2 from them so you can file your income tax return. If that doesn’t work, you will have to claim your wages and taxes by filing your income tax return without a W-2.
If you earned less than the FICA threshold of $1,800, report your wages on line 7 of Form 1040 along with the letters "HSH," which is the code for household employment. If you earned more than $1,800, you will have to file Form 4852 which serves as a substitute for the W-2. Finally, if you received a 1099, you need to file Form 8919 to figure and report your share of the uncollected FICA taxes due on your compensation.
Because of the potentially expensive tax problems this could create for you and your employer, we advise you to do everything you can to educate your employer on the tax process for household employers (a.k.a. the "nanny taxes")...most busy families simply are not aware of their responsibilities. You might want to share our helpful literature and videos -- and also let them know that we're happy to provide a free personalized phone consultation if they'd like to call. We’re here to help!
February 5, 2013
Over the years, the IRS and the state tax agencies have made it very clear that nannies, personal assistants, housekeepers and other domestic workers must be classified as employees of the family – not as independent contractors.
The distinction is not based on how many hours someone works, how much they’re paid, what type of work they perform or what they call themselves in a contract. It is based on who’s deemed to be in control of the work relationship.
Independent contractors have control over how, when and by whom a job is performed. On the other hand, employees follow the schedule and instructions established by the employer.
This seemingly subtle distinction matters because employer taxes are used to fund important worker benefits, such as unemployment. Additionally, misclassification costs the worker in terms of incremental tax burden; independent contractors are responsible for both the employee and employer portions of the FICA taxes, which add 7.65% to the worker’s tax responsibility.
Because of these financial implications, worker classification enforcement has become a focal point of state and federal tax agencies, who consider misclassification to be felony tax evasion. So it’s important that families understand the law and correctly report wages. If someone tells you to “just 1099 her” beware; Form 1099 is the form that businesses use to report payments to an independent contractor. An employee’s wages should be reported using Form W-2.
To learn more about worker classification – or to correct a misclassification mistake – give us a call or visit our Expert Advice section.
October 29, 2010
We’ve had lots of calls recently in which clients have been mis-advised to “1099 their nanny.” (Form 1099 is the form used to report money paid to an independent contractor). The IRS has ruled definitively on this subject: nannies ARE NOT independent contractors; they are employees of the families for whom they work.
By providing a 1099, the families misclassified their nannies, which is considered tax evasion and carries expensive penalties and legal problems. In addition, it hurts the nanny financially because independent contractors have to pay an additional 7.65% in taxes (independent contractors pay the entire 15.3% in Social Security & Medicare taxes whereas employees only pay half).
If someone tells you to “just 1099 her,” ignore it and set them up as an employee. You’ll be doing yourself and your nanny a big favor.