What You NEED to
Know About Nanny Taxes
November 1999
Should
you be paying nanny taxes this year? The correct
answer may surprise you. The revision of the "Nanny
Tax" legislation in October 1994 gave taxpayers a
somewhat false sense of security. Congress did make some
improvements to the rules governing the reporting and
remittance of nanny taxes. For example, the wages paid to
teenage babysitters are now exempt, as well as most other
household services provided by those aged 18 or younger.
However, Congress substantially raised the risk and
penalties for noncompliance with one deceptively simple
change--the incorporation of the federal nanny taxes on
the employer's personal income tax return. "Failure
to report household employee wages and pay social
Security and Medicare with [your] annual personal income
tax return could result in penalties and interest. A
willful violation of these rules," warns George
Schutzer, a tax partner at Patton Boggs, LLP, a
Washington, DC law firm, "could be considered
criminal fraud and subject the violator to fines or
imprisonment."
State
reporting rules did not change with this legislation.
Most household employers are still required to do wage
reporting to their state on a quarterly basis. The
paperwork was improved, but not eliminated.
Just
exactly who is responsible for the nanny taxes?
Nanny employers are not the only people faced with this
issue. Most people who engage a worker to perform
domestic services in their private residence become
employers. Employment taxes are due for housekeepers,
companions, home health aides and other domestic workers.
Congress estimates that there are between 2-2.5 million
household employers in the US today, and only 500,000 of
them actually paid these taxes in 1994. If you pay
$1600 (2008)or more in total wages to a household worker in
2008, you are responsible for the social security
and medicare taxes, as well as providing Form W-2 to the
worker. If you pay [or will pay] $1000 or more in total wages in
any calendar quarter within the last two years, you also become responsible
for unemployment taxes, both federal and state. Income
taxes, on the other hand, are generally the obligation of
the domestic worker, although many employers agree to do
the income tax withholding and remittance for the worker.
[NannyNetwork.com Note: The wage that triggers a Social Security/Medicare tax obligation has steadily increased. From 1995-1997 it was $1000/year; 1998-1999 $1100; and 2000 $1200; 2001 - 2002 $1300; 2003 - 2005 $1400; 2006 - 2006 $1500; 2008 - 2009 $1600]
How
much money are we talking about?
The average salary of a full time nanny is $420 per week (1999),
over $21,800 per year, according to Kathleen Webb of HomeWork Solutions, a nationwide
provider of nanny tax services to employers
(800-NANITAX). Webb reports that "Social Security
and Medicare taxes on that amount are $3,300 a year. Add
on Federal Unemployment Tax (FUTA) and State Unemployment
Taxes and you can owe $3,600 or more."
"Employers
are shocked when we itemize the taxes they are
responsible for, particularly when they realize they're
responsible for remitting both parts of the Social
Security and Medicare contributions," Webb says.
"Then, many discover that their unmarried nanny owes
about $1,500 in federal income taxes and perhaps another
$400-700 in state income taxes. When April 15 comes
along, they aren't prepared for any of this."
How do
you go about paying the nanny taxes?
There are a number of steps to be taken just to get
started paying the household employment taxes. You will
need to consider the following:
- You
must have Federal Employer's Identification
Number. Call 1-800-TAX FORM to request Form
SS-4 and Publication 926 Employer's Guide.
- Unemployment
Taxes: State wage reporting and most state
unemployment tax remittances are required
quarterly. New employers must register with the
state to obtain a state reporting number.
- Withholding
Taxes: Most states require quarterly reports
and remittances of withheld income taxes, as well
as an annual reconciliation.
- Provide
your employee with Form W-2 Wage and Tax
Statement no later than January 31. You may
obtain these forms by calling 1-800-TAX FORM.
Mail copies of Form(s) W-2 and Form W-3 (if
required) to Social Security Administration by
February 28. There is a fine for late submission.
- Calculate
your Federal Employment Tax Liability,
including Social Security, Medicare, Withheld
Income Taxes, and Federal Unemployment Taxes.
Complete Schedule H and remit taxes due with the
Form 1040 no later than April 15.
If you're
feeling overwhelmed with all this information, you're not
alone. Webb reports that demand for her company's payroll and tax services is
strong. "We assist domestic employers across the
United States with these filings, calculations, and
resultant correspondence," says Webb. HomeWork
Solutions, Inc., of Sterling, VA, introduced its NaniTaxsm and NaniPaysm services in 1993
and offers a variety of service levels (800-NANITAX).
They can help you identify which taxes, if any, you owe,
and how and when to pay them. As Kathleen Webb points
out, "it is far better to pay the appropriate taxes
today, then to pay the taxes AND the penalties
later."
About
the author:
Lisa B. Mears is a free lance writer and the owner of the
desktop publishing firm Bookman Graphics,
Sterling VA. She is the mother of three children.
[LAST UPDATED NOVEMBER 2008]
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