Time to Pay Your Nanny Tax?
With the advent of the so-called Nanny Tax in 1994, it became a little more complicated for a family to hire a nanny, housekeeper or senior caregiver.
A number of recent developments have made the hiring of such workers even more complicated.
Many people don't bother reporting or paying their Nanny Tax because employment taxes can be expensive. But be careful in making that decision, because the fines and penalties of not paying them can cost much more.
A little over two decades ago, you may recall (if you are old enough) that unfiled domestic employment tax returns cost two potential U.S. Attorney Generals a chance at the job. More recently, there have been issues involving US senatorial candidates, cabinet nominees, and even nominees to the Supreme Court.
Fine, you say, but that's just a problem for high profile folks.
Well, there are also new information sharing agreements in place now between federal agencies, as well as between the federal government and state governments. Factor in a growing domestic workers' rights movement that is taking place, and this becomes an issue for all families, not just those in the public spotlight.
Adding fuel to the fire is the Affordable Care Act, popularly known as Obamacare. To qualify for the Obamacare subsidy that so many need to be able to afford health insurance, a worker typically needs a W-2.
As people discover this, they are beginning more and more to desire being treated as an employee instead of an independent contractor. The Service Employees International Union is even funding outreach efforts that are educating workers on their rights, and many states have a domestic worker bill of rights law of which to be aware.
Often, a family will turn to CPAs like me for counsel on these matters, since taxes are involved. Nannies, housekeepers, senior caregivers and other domestic workers may be considered employees, with the family treated as the employer. FICA, as well as federal and state unemployment taxes may have to be dealt with, and income tax may also have to be withheld.
One thing people often don't understand is that domestic workers are by law hourly employees. You can't just hire someone to work and pay them a flat amount. You have to do the math, because these workers are hourly employees, and must be compensated accordingly, including being paid for overtime if applicable.
Naturally, most households don't have time clocks for their domestic help. Into the fray steps the Department of Labor (DOL). The DOL, believe it or not, has published smartphone apps to help workers keep track of their hours, even giving geographic location.
Why is this such a big deal? Well, in the event of a dispute, and absent any other form of documentation, the benefit of the doubt will likely go to the worker every time.
Additionally, many state unemployment funds are in dire straights and in need for funds, which gives states greater incentive to enforce the law and collect unemployment and other payroll related taxes.
Here's an example of what can happen – a caregiver may take care of an elderly family member for several years. When that family member passes away, the worker decides to head to the state unemployment office. In Arkansas, that is the Department of Workforce Services (DWS). DWS has no record of taxes being paid.
Result? The state not only goes after the family to pay the taxes they should have, but under information sharing agreements, they will inform the U.S. DOL and the IRS. Not an inexpensive situation and one to be avoided, because it can get ugly.
Complexity is added for those who may have multiple residences and/or domestic help who travel with them because withholding and reporting may be required in multiple jurisdictions.
And even if you own 100 percent of a business, don't make the mistake of simply treating them as a business employee. Domestic workers are not the employees of your business but rather your household. Treating them as part of your business can have serious negative implications all its own.
Knowledge is power, and now you know what could happen if the law regarding the treatment of household workers is not followed. Is it required for every, especially infrequent, use of domestic labor?
No, not really. There are certain minimums that have to be met before the rules apply. But be aware that someone who works for you on a consistent basis over a period of time may very well be entitled to being treated as an employee, meaning you could have employer obligations to meet.
