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"TIP OF THE MONTH"
(April 1996)
Nanny Taxes
Time to Come Out of the (Broom) Closet?
Under current law, if you pay certain household employees (e.g., a baby-sitter or house cleaner) $1,000 or more in wages in any calendar year, you must pay social security and Medicare taxes (FICA) and federal unemployment tax (FUTA) for that employee. But these rules do not apply to independent contractors you hire to do household work. And, special rules apply to certain family members. If the worker was born in 1968 or later, you are liable for employment taxes only if domestic service is the employee's primary occupation. Generally, an independent contractor is someone who has their own business, and is not under your direction or control in performing their services. Independent contractors are responsible for their own self-employment taxes. The Internal Revenue Service is very strict about who is an independent contractor. For example, a baby-sitter who watches your child in your own home is generally an employee, not an independent contractor.
You need not withhold income taxes from wages you pay a domestic employee in your home, but you may withhold income taxes if you and the employee agree. Whether or not you withhold income taxes on the wages of a domestic employee, the domestic employee must pay income taxes on the wages, and you may be liable for employment taxes.
You must give each employee a Form W-2 by January 31 of each year for the preceding year. You must also file Copy A of Form W-2 with the Social Security Administration by February 28.
You must inform the employee that they may have the right to advance payment of the earned income credit. You may comply with this requirement by giving the employee Notice 797 (Possible Federal Tax Refund Due to the Earned Income Credit) or Form W-2 (notice is printed on the back of Copy C).
Under current law, if you withhold income taxes from your domestic employee's wages, you report the withholding and pay it with your payroll taxes (FICA) on Schedule H of Form 1040 on April 15.
"Beginning in 1995, employers' tax return preparers may be subject to preparer penalties if the preparer has some reason to believe that an employer failed to accurately report the taxes due. For example, a preparer may have a duty to make inquiries if the client claims a cleaning expense for a home office, claims the Code Sec. 21 child and dependent care credit,...or merely reports two incomes and claims a young child as a dependent.
"Employers who do not file a Form W-2 with the IRS, or who file one with incorrect information, can be charged with a penalty ranging from $15 to $100 for each form, depending on when the form is eventually filed. Employers who do not give a copy of the annual W-2 form to an employee can be subject to another penalty of $50 for each form. In addition to civil penalties, criminal penalties may be imposed for intentionally not paying taxes, for not filing returns, or for filing a false return."
You may also have state withholding and filing requirements.
You should also contact your insurance agent to ensure that you have the necessary insurance coverage for your domestic employee, including worker's compensation and general liability insurance. If your domestic employee drives, you may need excess liability, and non-owned auto insurance.
In addition, you may be subject to state and federal labor laws, equal employment opportunity laws, and minimum wage laws, among others. When in doubt, you should seek legal counsel.
Note: This discussion was adapted, and contains quotes, from the Standard Federal Tax Reporter, March 1996 CCH CD-ROM
CCH Electronic Library, published by CCH Incorporated.
As always, general advice may not apply to your specific situation, and rules change constantly, so you should get a professional opinion before you rely on this information.
Read the "Tip of the Month" for
March 1996. "When Do You Need Receipts for Charitable Donations?"
Read the "Tip of the Month" for
February 1996. "Who Qualifies as Head of Household?"
Read the "Tip of the Month" for
January 1996. "Save Taxes. Open an Individual Retirement Account."
Read the "Tip of the Month" for
December 1995. "Economic Reality Audits. Should You Be Afraid?"
Read the "Tip of the Month" for
November 1995. "Should You Buy or Lease Your
Next Car?"
Read the "Tip of the Month" for
October 1995. "Save Taxes! Put Your Junior Programmers to Work"
Read the "Tip of the Month" for
September 1995. "California Statutory Wills"
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