The hiring process is the time to address nanny taxes. But many families are so focused on finding the perfect caregiver that they overlook the employer tax requirements and unnecessarily expose themselves to financial and legal risk.
This edition of The Legal Review highlights this scenario as the Johnson family runs into tax trouble when their occasional babysitter, Brooke, begins to work for them as a full-time nanny. She couldn’t be more excited to have her first full-time job, but it didn’t occur to her or the Johnsons that there would now be legal responsibilities involved with her employment.
Brooke began her work as a full-time nanny with the Johnsons in the summer of 2012. Since she recently graduated from college, Brooke was thrilled to have a steady income and had no issue continuing the type of employment agreement she already had with the Johnsons. The family paid Brooke in cash at the same hourly rate they agreed on when Brooke began babysitting and their arrangement appeared to be progressing smoothly.
Until January. Brooke’s father, an accountant, began pestering her about filing taxes. He told her that she was an employee now and her income needed to be reported to the IRS. Brooke approached the Johnsons for guidance, and eager to help, they produced a 1099 for her listing her wages for the year.
If a family pays a nanny, senior caregiver or other household employee $1,800 (2013) or more in a calendar year (in 2014, the threshold will increase to $1,900), they are required to withhold Social Security and Medicare (FICA) taxes from the employee’s wages and pay a matching portion of FICA taxes on top of their employee’s gross earnings. They are also required to pay federal and state unemployment insurance taxes if the employee earned more than $1,000 in a calendar quarter.
Note: Other employer taxes may apply depending on the employer’s residence state. Visit your state’s tax page for more details.
Additionally, nannies are classified as employees in the eyes of the IRS, not independent contractors. In order to legally report their wages and the taxes withheld, their employer must provide them with an accurate W-2 by January 31. Families who misclassify their nanny as an independent contractor by providing them a Form 1099 can be subject to tax evasion charges by the IRS. Recently, the U.S. Department of Labor released its budget details, including a new line item for $10 million in state grants to enhance enforcement of worker classification laws.
Brooke obtained the 1099 from the Johnson family and brought it to her father so he could assist her in filing her taxes. Her father immediately realized this was incorrect and instructed Brooke to have the Johnsons provide her a W-2.
Afraid she would end up in legal trouble with the IRS, Brooke came to the family in a panic explaining the difficulty she was having filing her taxes. The Johnsons were embarrassed and unaware of what to do since they paid Brooke in cash and obviously never withheld FICA taxes for the entire time she worked for them in 2012. They were also concerned for their personal tax liability because they never paid the matching employer portion of FICA taxes.
Brooke asked her father if he could help her and Johnsons remedy their tax situation. But because household employment taxes were not something his accounting office handled, he advised the Johnsons to call Breedlove & Associates.
Mrs. Johnson called the next day and spoke to a Breedlove consultant who informed her that we could go back to the previous year and file the appropriate tax returns to ensure they were compliant with the law. When the consultant explained that a W-2 could be prepared for Brooke in only a few days, the Johnsons signed up immediately. The family informed Breedlove & Associates of all the wages they paid to Brooke and agreed to cover the taxes that should have been withheld.
Breedlove & Associates was then able to retroactively file all of the Johnson’s state tax returns for the 2012 tax year and process the year-end documents – including Brooke’s W-2 – which listed the correct amounts of Social Security and Medicare taxes. Brooke was finally able to file her taxes. To top things off, Breedlove & Associates was even able to get the state to waive the penalties they assessed on the Johnsons for filing their taxes late.
How the Whole Thing Could Have Been Avoided:
If the Johnsons had only been aware that hiring a nanny full-time entailed new responsibilities as an employer, the whole mess could have been avoided. Breedlove & Associates works to educate and keep families compliant with the law. By withholding taxes the whole year, making appropriate tax payments and filing correct returns, Breedlove & Associates ensures that every employer is acting within the law and is never stuck in a bind like the one the Johnsons found themselves in. The Johnsons are grateful that Breedlove & Associates now handles Brooke’s W-2 and everything else related to her pay and their taxes!