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In the World of Nanny Taxes, a 1099 is Never the Right Answer

by Breedlove November 20, 2013

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. 

 

The Mistake:

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.

 

The Law:

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.

 

The Mess:

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.

 

The Outcome:

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!

Nanny Tax Tip: Take Advantage of Your FSA Open Enrollment Period

by Breedlove October 17, 2013

If you have a nanny or other childcare provider currently working in your home – or are planning to hire in 2014, now is the time to check with your company’s human resources department about enrolling in a Dependent Care Account (a.k.a. Flexible Spending Account or FSA) next year. If you or your spouse has access to this benefit, you’ll be able to pay for up to $5,000 of your childcare expenses with pre-tax dollars. Depending on your marginal tax rate, this will save you between $2,000 and $2,300 next year.

Most companies have open enrollment for their FSA program in the fall and, if you miss it, you’ll have to wait another 12 months unless you have a “life-changing event” such as the birth of another child.

If you miss the enrollment period, you can still take advantage of the Tax Credit for Child or Dependent Care. While the savings are much less than an FSA ($600 if you have one child or $1,200 if you have two or more children), it’s still worth taking advantage of.

For more information on dependent care tax breaks, visit our Answers section or give us a call.

How the California Domestic Worker Bill of Rights Affects Families

by Breedlove October 7, 2013

Recently, California Governor Jerry Brown signed AB 241, the Domestic Worker Bill of Rights, into law effective January 1, 2014. Originally the bill included provisions for overtime, off-duty meal breaks and a 30-day notice of termination.

The off-duty meal breaks and 30-day termination notices were struck from the final bill. However, the new law stipulates that all domestic employees in California will be entitled to overtime.

The specific overtime requirements will vary depending on the type of worker. For most families, the following overtime stipulations will apply to their employment situation.

Personal Attendants (nannies, baby nurses, senior caregivers, etc.)

·         Live-Out – Overtime is required if the employee works more than 9 hours in a day and/or 40* in a 7-day workweek.

·         Live-In – Overtime is required if the employee works more than 9 hours in a day and/or 45 hours in a 7-day workweek.

* Federal law governed by the Fair Labor Standards Act (FLSA) entitles all live-out domestic workers to overtime rates for all hours worked over 40 in a workweek. Therefore, the weekly overtime threshold of 45 hours mandated in AB 241 is only applicable to live-in personal attendants.

All Other Domestic Workers (housekeepers, personal assistants, chefs, estate managers, etc.)

·         Live-Out – Overtime must be paid to the employee if they work more than 8 hours in a day and/or 40 in a 7-day workweek.

·         Live-In – Overtime is required if the employee works more than 9 hours in a day.

NOTE: There are additional overtime requirements for employees that work 12 or more hours in a day or 6 or 7 consecutive days in a workweek. Please call our office for details if this employment situation arises for you.

Financial Illustrations of the Cost Impact to Employers

Not all families with overtime situations will be impacted by these changes. If a family employs a nanny 5 days per week and she works 10 hours per day, her payroll will not change:

2013 Wages                                      2014 Wages
Hourly Rate = $16/hr                      Hourly Rate = $16/hr
Regular Hours Worked = 40          Regular Hours Worked = 40
Overtime Hours Worked = 10       Daily Overtime Hours = 5
                                                           Additional Overtime Hours = 5

Total = $880                                     Total = $880
(40 X $16) + (10 X $24)                   (40 X $16) + (5 X $24) + (5 X $24)

However, if the same family employs a nanny 3 days per week and she works 11 hours per day, her payroll will be affected by the 2 additional hours of daily overtime each day she works:

2013 Wages                                     2014 Wages
Hourly Rate = $16/hr                     Hourly Rate = $16/hr
Regular Hours Worked = 33         Regular Hours Worked = 27
Overtime Hours Worked = 0        Daily Overtime Hours = 6

Total = $528                                    Total = $576
(33 X $16)                                        (27 X $16) + (6 X $24)

As you can see from the above illustrations, these changes may not affect many families. However, if you need any assistance with this new overtime legislation, please give our office a call. We're here to help! 

A Toast to Nanny Appreciation Week

by Breedlove September 27, 2013

This weekend draws a close to Nanny Appreciation Week – a time to show the hard-working, unsung heroes of our society how much we appreciate the effort they put into caring for our children. We hope you’ve shown your caregiver how much you appreciate the way she cares, instructs, teaches, nurtures, inspires and protects your loved ones.

We also want to thank all the families that give the gift of professional pay to their nanny year-round. It is one of the best things you can do for her because she has all the protections and benefits that other professionals enjoy (retirement income and insurance through Social Security and Medicare, unemployment benefits, etc.).

Changes to Healthcare Law May Benefit Families

by Breedlove August 20, 2013

A new era of health insurance is set to begin on January 1, 2014. The Patient Protection & Affordable Care Act (also known as "ObamaCare") will usher in dramatic changes to coverage requirements and policy procurement. This month, The Legal Review takes on a different look as we demystify our new universal healthcare system and examine its effect on household employment.
 
Coverage Requirements
 
Next year, every U.S. citizen will be required to have health insurance coverage - either their own policy or through a spouse, parent or group plan. The consequences for not having coverage will be a fine, which will become increasingly punitive over the next few years. Unfortunately, many household employees currently don't have health insurance - due to expense, difficulty obtaining coverage or simply a lack of perceived need.
 
Beginning October 1, 2013, each state will provide access to an online health insurance exchange, which will provide a marketplace where individuals can compare health insurance plans and purchase a policy that suits their needs. Links to the exchange in each state can be found on our state-specific web pages.
 
How Employers Can Help AND Save Money
 
While household employees will be required to have health insurance coverage, household employers are NOT required to offer or pay for the coverage. However, Congress has created incentives for employers to make health insurance contributions part of the compensation package.
 
First, the employer contribution is considered non-taxable, so neither the employer nor the employee is required to pay any taxes on that portion of the compensation.
 
Second, families are eligible for a health insurance tax credit (HITC) - as long as they pay for at least half of their employee's health insurance premium and the annual wages they pay to the employee (or average annual wages if they have more than one employee) is less than $50,000. Currently, the HITC provides a tax credit of up to 35% of the employer's health insurance contributions. However, this credit will increase to a maximum of 50% starting in 2014.
 
The combination of non-taxability and tax credit make employer-paid health insurance a very attractive benefit option for most families. Take a look at the following example to see how a nanny's income and a family's cost can be affected by the family covering the full cost of a health insurance policy at $300 per month (or $3,600 annually):

 

 

As you can see, the nanny takes home more money and the family saves money. It's a win-win for both family and caregiver.
 
How Families Can Pay for Insurance and Receive the Credit
 
Generally, a household employer is not able to set up a group health insurance policy to offer their employee. Instead, the employee should find and purchase an individual policy of their choosing. The family may pay up to the entire monthly premium for their employee and should make payments directly to the health insurance company in order to keep accurate records of their contributions. At tax time, the family will file Form 8941 with their personal income tax return to claim the tax credit for their health insurance contributions.
 
What if the Employee Purchases Insurance on Their Own?
 
If a family does not wish to contribute to their employee's health insurance premiums or the employee wishes to purchase coverage on their own, they can still be eligible for a subsidy to offset the financial burden if they purchase a policy through their state's exchange. The amount of the subsidy is based on the employee's income level and will usually be credited to them at tax time. (In certain circumstances the employee may be able to receive their subsidy earlier)
 
How We Can Help
 
At Breedlove & Associates, we're always happy to help our clients understand the tax benefits of including health insurance in the compensation package and how to handle the payroll logistics. Saving families and caregivers money is our favorite part of the business!

Back-to-School Tip: NannyShare Arrangements Make Childcare More Affordable

by breedlove August 15, 2013

We talk to a lot of families who express a desire to upgrade their childcare situation from a daycare to a nanny.  They cite flexibility of hours, quality & consistency of caregivers, exposure to illnesses and convenience as the primary reasons to make the transition.


With 2 young children, the cost of a nanny can be reasonably close to the cost of daycare – so the decision is pretty easy.  With 1 child, a nanny is quite a bit more expensive, making it difficult for many families to make it work financially.

For this reason, NannyShares have become very popular.  By splitting the cost of a nanny, more and more families are finding that high-quality in-home care is within reach. 

But, to make it work, both families need to work together to build consensus on a wide variety of issues, including diet, activities, schedule, discipline, communication, compensation and more. 

From a legal perspective, it’s important to know that each family in a NannyShare is considered an employer and, therefore, each needs to handle the “nanny tax” obligations separately.  The good news is that each family gets to take advantage of the childcare tax breaks, which typically more than offset the employer tax costs in NannyShare situations (visit our free nanny tax calculator for an estimate of your employer taxes and tax breaks).

The bottom line is that NannyShares can be a great solution for hard-working families trying to get the quality of a nanny at a price that is comparable to daycare.

Nanny Hiring Tip: Capitalizing on Tax Breaks

by Breedlove August 14, 2013

When families start the nanny hiring process, there are lots of questions about the cost.  Are there tax breaks available?  Which one should I use?  Are there income restrictions?  How much should I budget?

 

Here’s what you need to know. 

 

All families who pay their employee legally are entitled to at least one tax break, regardless of their income level.  The only restrictions are that the children under care must be under age 13 and both parents must pass the “work-related test,” meaning each is employed, looking for employment or a full-time student.

 

For many families, the tax savings offset most of the employer tax cost.  For some, the savings can even exceed the cost of their employer taxes (yes, it’s possible to come out ahead financially).

 

Here are the two childcare tax breaks: 

 

1) Dependent Care Flexible Spending Account (FSA). Many companies offer their employees the option to contribute up to $5,000 of their pre-tax earnings every year to an FSA. Because paying nanny taxes qualifies as a childcare expense, you can take advantage of paying these expenses tax-free. Depending on your marginal tax rate, this tax break can save as much as $2,300 per year.  If you think your company offers an FSA program, we recommend that you talk to the benefits manager about enrollment.  Open enrollment usually occurs in the fall for the subsequent tax year, but there are exceptions for life-changing events such as the birth of a child that may allow you to enroll in this tax year.

 

2) Child and Dependent Care Tax Credit. Household employers are entitled to a 20% tax credit on childcare expenses of up to $3,000 for one dependent ($600 savings) or up to $6,000 for two or more dependents ($1,200 savings). You can claim this tax credit by completing IRS Form 2441 as part of your personal income tax return at year-end.

 

Notes:

If you only have one dependent under age 13, you’ll have to choose between the two tax breaks.  For most families the FSA is the best option. 

 

If you have two or more dependents under age 13, you can take advantage of both tax breaks if your childcare expenses were greater than your FSA contribution. Excess expenses (up to the $6,000 expense limit) may be applied to the Child and Dependent Care Tax Credit on Form 2441.

 

To calculate your employer budget, visit our free Nanny Tax Calculator.  With these significant breaks, most families find that paying a nanny legally is not only the right thing to do, it’s also the wise thing to do.

Back-to-School Tax Tip: Worker Classification and Your Tax Responsibilities

by breedlove 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.

2nd Quarter State Nanny Tax Deadline Coming Up

by Breedlove June 28, 2013

Families who had a nanny, senior caregiver, personal assistant or other household employee during the second quarter of 2013 (April – June) have employment tax deadlines coming up in the next few weeks. Each state requires 2nd quarter employment tax returns be filed and taxes remitted in July. In most states, the filing deadline is the end of July, although some states' deadline is earlier.

These employment tax returns report the wages you paid to your employee and calculate the amount of state unemployment insurance tax and state income tax (where applicable) you owe. Some states also have small additional taxes that are included in your employment tax returns. If you need to know all the requirements in your state, please visit our new Tax and Labor Law Summary pages at www.breedlove.com.

Taking care of your "nanny tax" obligations helps your employee obtain benefits such as Social Security, Medicare, unemployment, disability and the ability to qualify for loans and credit. It also eliminates financial and legal risk for your family – as failure to handle these requirements is considered tax evasion.

If you need help with your "nanny tax" filing or getting your nanny “on the books” for the second quarter, let us know. We’re here to help.

FSA Window for Life-Changing Events

by Breedlove June 6, 2013

Did you know that in the U.S. there are more babies born during the summer than any other season of the year?  It’s one of the reasons that demand for professional childcare reaches a peak during the summer. So, it’s a good time to remind everyone about FSA enrollment. For families who have just given birth – or are about to welcome a new member to their household – this edition of The Legal Review will share a simple tip worth as much as $1,500. 

The Situation
A couple gave birth to their first child on April 19. In early May, they began working with a local placement agency to find a nanny so the mom could go back to work after Memorial Day. With about a week to spare, they found the perfect nanny. As the family worked with the agency to finalize the employment paperwork for their nanny, the family’s placement counselor provided them with information about their tax and payroll obligations as a household employer and shared the good news about tax breaks. The family told her that they had not enrolled in their company’s Flexible Spending Account but would do so in the subsequent year.

Having read through the Expert Advice section of our website, the counselor remembered that there were some special opportunities to enroll in the middle of the year if you just had a baby.  So, she advised the family to talk to their HR people as soon as possible.

The Law
Families with childcare expenses are entitled to tax breaks to help offset some of the costs.  There is no income restriction on the tax breaks, so all families qualify as long as their children are under age 13 and both spouses are working, looking for work or are full-time students.

The most lucrative tax break is the Dependent Care Account (also referred to as “Flexible Spending Account” or “FSA” as part of a company’s “Cafeteria Plan”). If one of the spouses has access to this benefit, the family will be able to pay for up to $5,000 of childcare expenses using pre-tax dollars. That means the family has no taxes on that portion of their income. This benefit saves most household employers between $2,100 and $2,300 per year, depending on the state they live in and their marginal tax rate.

Enrollment in the FSA is limited to once a year (most companies do open enrollment in the fall for the subsequent tax year). However, there is a 30-day window after “life-changing events” where the family can enroll mid-year and the birth of a child is one of the qualifying events. If families miss that window, they can still take advantage of the Child and Dependent Care Tax Credit when they file their federal income tax return. However, this tax break saves a maximum of $600 per year for families with one child or $1,200 per year for families with two or more children.

The Outcome
Upon speaking to the HR person, the family learned more about the 30-day window for life-changing events and they were able to enroll in the FSA program for the current tax year. Given the family’s marginal tax rate, they will be able to take advantage of $2,100 in tax savings for the 2013 tax year.

Without that tip from the counselor, the family would have missed the enrollment window, which would have forced them to settle for the Child and Dependent Care Tax Credit’s $600 worth of tax savings. That $1,500 of additional savings will pay for a lot of diapers and baby food!

How to Ensure Families Maximize their Tax Savings
Unfortunately, it is extremely common for families to miss out on enrolling in an FSA after the birth of a child. As first-time parents become first-time employers, there is a lot of new information to process and 30 days is not a lot of time to know everything about being a household employer.

That’s why we offer a New Employer Orientation free of charge. This 10-minute, no-pressure, no-obligation phone call allows a Breedlove & Associates tax expert to assess a family’s unique situation and provide guidance on all the tax and labor law issues that will come into play for them. Whether they decide to use our comprehensive payroll, tax and HR service or not, this guidance will likely save them thousands of dollars and dozens of hours.



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