nanny tax pitfalls
Balancing work and child rearing is challenging enough.
But if you get outside help for these chores, you'll also have
to decipher the complexities of tax and labor law.
This is exactly the situation
faced by many Americans who pay for child care.
And if this helper regularly comes to you rather
than you dropping Jimmy and Susie off at a day
care center, then you'll likely pay Uncle Sam
as well as your nanny.
Although it's popularly referred to as the "nanny
tax," any household help -- including a gardener, private nurse
or maid -- is going to cost you more than salaries. In most cases,
you also have to pay employment taxes for domestic workers.
A lot of people are taking a closer look at
the potential labor and tax traps of household help after a couple
of Obama Administration appointees revealed they had trouble following
New Treasury Secretary Timothy Geithner had employed an immigrant to provide household help and her work papers expired while she was still working for him. However, the employee immigration issues, along with Geithner's underpayment of his own self-employment taxes, didn't keep him from being confirmed.
It was a different story for Nancy Killefer. She was nominated by President Obama to serve as the country's first Performance Officer, but decided to turn down the appointment. In 2005, nonpayment of taxes for household help led to a lien on Killefer's home. Although she paid the back taxes years ago, Killefer cited tax issues as part of her reason for withdrawing her name from consideration.
Outside the Washington, D.C., beltway, scores of Americans find themselves grappling each year with the same issues. Correctly complying with the rules is important not only to your employees, but also to your own tax bottom line. Household employment taxes are folded into your personal income tax return, so you need to keep track and figure them accurately. If you don't, it could cost you even more.
Tax types and limits
There are two separate employment taxes to consider. Whether you're
responsible for either hinges on the amount you pay and how much
control you have over the way the job is done.
First is FICA, the Federal Insurance Contributions
Act amount that almost every wage earner sees taken out of his or
her paycheck. This tax money goes to pay for the worker's future
Social Security and Medicare distributions.
If you paid a household employee $1,600 or more in 2008,
you must pay FICA taxes for that person. (The
2009 earnings threshold is $1,700.) This 15.3
percent tax generally is split equally between
the worker and boss, with each paying 6.2 percent
of income toward Social Security, plus 1.45
percent for Medicare.
Then there is the Federal Unemployment
Tax Act, or FUTA, payment that covers unemployment
compensation to workers who lose their jobs.
The unemployment tax is paid only by the employer. It's required if your total household salaries are $1,000 or more in any calendar quarter. You generally must pay unemployment tax on the first $7,000 of wages you pay each household employee.
The unemployment tax is 6.2 percent of your employee's FUTA wages. However, you may be able to take a credit of up to 5.4 percent, effectively making your employer tax payment just 0.8 percent. To take the full credit on your 2008 return, you must make all of that year's required contributions to your state unemployment fund by April 15. The credit is reduced of payments made after that date.
State taxes, too
Don't forget about state obligations. You also might need to pay
state unemployment taxes. Check with your state's unemployment tax
agency; a list of offices is included in IRS
Publication 926, Household Employer's Tax Guide.
Many states also require you to pay for workers'
compensation in case your employee is injured on the job.
Who's the boss?
What you pay your help isn't the only consideration when it
comes to employment taxes. The control factor is just as important.
A household worker is your employee if you directly
manage not only what work is done, according to the Internal Revenue
Service, but also how it is done. It doesn't matter if the worker
is full-time or part-time or whether you pay on an hourly, daily
or weekly basis or by the job. If you are in charge of job particulars,
the IRS deems you in control and you must pay the appropriate taxes.