The so called "nanny tax" does not only apply
to babysitters. It applies to any household or domestic employee. To quote the
IRS Regulations Section 31.3306(c)(2)-1(a)(2),
"In general, services of a household nature in
or about a private home include services performed by cooks, waiters,
butlers, housekeepers, governesses, maids, valets, baby sitters, janitors,
laundresses, furnace men, caretakers, handymen, gardeners, footmen, grooms,
and chauffeurs of automobile for family use."
Since that list is not inclusive enough for me I will
add bookkeepers, cleaning services, private nurses, and the kid who mows your
lawn. By the way, can anyone tell me what a "footman" is? And, do I
need one?
A brief history lesson is in order because many
Americans who may be subject to the "nanny tax" are too young to recall the
scandals that led to enactment of the "Immigration Reform and Control Act
of 1986," and the related statutes governing household employees. Back
then, politicians were dishonest. (That was a joke! I have to point it out
because most people don’t get accountants’ humor). It seemed as if every
time someone was considered for political appointment a skeleton in the closet
was revealed. Potential judges, cabinet members, and well-respected civic
leaders were all guilty of hiring a babysitter or household worker without making the proper
tax arrangements. I’m told this is commonly referred to as "paying off
the books." In some of these cases, the problem was compounded by the fact
that the "nanny" was an illegal alien.
Congress solved the problem years ago by enacting harsh
legislation. At least, that is what they led their constituents to believe. In
truth, they only put a Band-Aid on the problem when major surgery was needed. To
my knowledge, the harsh laws have never really been enforced. I’m sure
immigration officials have much more important things to do than busting
babysitters. In addition, IRS has been noticeably absent when it comes to
enforcement of the revenue regulations in this area. In my opinion, as a result
we now have more illegal "nannies" then ever. The only difference is the problem has been swept under the carpet.
You cannot solve a massive problem like this with a
Band-Aid approach. I believe it is like a time bomb waiting for a catalyst to
explode. Perhaps the IRS will soon wake up and realize something is wrong.
Maybe it will again become politically fashionable to bash immigrants. Or
perhaps our leaders will see opportunities for revenue enhancements. If you’re
like me, you don’t want to be anywhere nearby when it hits the fan. (I’m the
type of person who gets arrested for jay walking). Thus, I advise strict
adherence to the following guidelines:
1. Don’t hire any employee or worker "off the books." First
of all, you would be subjecting yourself to potential civil and criminal
penalties. Secondly, you would be opening a "can of worms" with regard
to potential liability for taxes, penalty taxes, and additional charges. Think about your potential liability if your employee
gets hurt and you don’t have the required workers compensation coverage. What
happens if you have a disagreement with your employee and he or she feels
entitled to unemployment insurance but you have paid none?
The stronger a person insists on working "off the
books" the greater reason you have for avoiding them. In addition to tax
evasion there is probably another reason why they must work "off the
books." It could be they are collecting some form of government or
disability benefit based on a deceptive claim that they are unable to work.
There is no reason for you to risk your neck to assist this person in
perpetrating a fraud, and this is not the type of person you want to hire
anyway.
One last reason for not paying any wages "off the
books" is that you will be short changing yourself if the payment would
otherwise qualify for a medical expense deduction or child care credit. You
would not be able to prove your deduction before IRS without admitting your own
wrongdoing.
2. Try to hire your child care employee
or household worker through a reputable agency
that can handle the taxes and reporting requirements. It is much easier that
way. In a similar fashion, you might give preference to a small corporation that
provides cleaning services instead of a regular cleaning person. Even a one
person corporation is preferable over an individual since it is less likely to
involve any employment issues.
3. If you cannot do your hiring through an agency, I
urge you to hire a payroll reporting company or a good
NY CPA (like me) to
handle the payroll chores. As you will see from the following, the requirements
are just too complicated for you to handle alone.
4. If you do hire someone who will receive more than
$1,100 this year, and you insist on doing the paperwork yourself, here are a few
things you should do:
- Start with IRS
form W4 and the Labor Department's form I-9. Form I-9 requires
that you take a look at official documents to insure that the employee
is allowed to work in the US. Passports, drivers licenses, birth
certificates, and social security cards are the types of documents you
must review. I like to exercise extreme caution and keep a photocopy
of these important records in my payroll files.
- Request an employer identification number from
IRS by filing form SS-4.
- Check your state tax filing requirements. This
presents yet another complication. We may already be confused by the 2
different filing requirements at IRS, or $1,100 per year
for the purpose of Social Security and Medicare taxes, but $1,000 per
quarter for federal unemployment taxes. In addition, you may face
different filing limits for state income taxes, state unemployment
taxes, and required state disability and workers compensation
insurance policies. Thankfully, NY State has recently consolidated
unemployment and income tax reporting. However, one of my best clients
recently forwarded me a notice from the "Workers Compensation
Board" stating there were different requirements depending
upon the number of hours worked by his domestic employee.
- After checking your state requirements the
next step is to arrange for the appropriate insurance. In most cases,
NY State requires both disability and Workers Compensation policies.
- Withhold the proper amount of Social Security
and Medicare taxes. The combined rate is 15.3%. You can split this
with your employee or you can pay it all. You are not required to
withhold federal or NY State income tax, but you can if you and your employee want to.
- Adjust your estimated taxes or withholding tax
to reflect the additional payroll taxes you now will owe to Uncle Sam.
Unless you are self-employed and have other employees, the social
security and Medicare taxes will become part of your income tax
liability for this year. You can be penalized if you don't pay enough
estimated tax before each quarterly due date.
- File the appropriate returns with your state
or local tax departments. NY State requires quarterly reports.
- File form W-2 to report the employees’ wages
for the year. The employee copies are due by January 31 and the
government copies are due by the end of February.
- File Schedule H with your income tax return.
Unless you are self-employed, you must report household employment
taxes with your 1040.
5. A final word of advice for anyone who chooses not to
follow these guidelines: I suggest that you should not run for political office
in the future.
With all the different federal and NY
State rules, a knowledgeable NY CPA is a must.
We provide a full range of employment tax
reporting services for NY employers. Our offices are
conveniently located in NY City and upstate New York.
