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  Paying The Nanny Tax

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Remember "Nannygate" from a few years back?  You might think that, unless you are being appointed to the President's cabinet, the "nanny tax" isn't something you need to worry about.  

However, if you have a household employee, whether its a maid, nanny, gardener, etc., the rules for withholding and paying federal employment taxes is definitely a concern. 

The IRS can and will levy serious penalties for noncompliance.  If you have a household worker who can be considered an employee, you need to be aware of the rules. 

Of course, the determination on whether your household worker is an employee or not isn't always easy.  Basically, the rule is this:  if you control what work is done, when its done and how its done, that worker is an employee.

If the worker controls how the work is done and performs the same work for the general public, then he or she is most likely an independent contractor.  

If you have questions about someone performing work for you, simply call us.  The rules are a little more complicated than the basic rule we outlined above, but we can walk you through them pretty quickly and can probably help you make a determination over the phone.

Illegal Immigrants

This is the issue that gets many household employers into trouble.  All employees must complete the employee part of the INS (Immigration and Naturalization Service) Form I-9.  This form verifies that the employee is either a United States citizen or an alien who can legally work in this country.

Employment Taxes

You may be required to withhold and pay Social Security and Medicare taxes if you have a household employee as well as federal and state unemployment taxes.  

Social Security and Medicare

If you pay cash wages of $2,000 or more to your employee, you must pay and withhold Social Security and Medicare taxes.  If you are not certain your employee will earn more than $2,000, it may be better to withhold the tax anyway and then repay the employee at a later time.   The combined rate is 7.65% of the applicable wages.  You are required to withhold 7.65% from the employee's wages and match that with another 7.65%.  

Many people who employ low-wage earners opt to pay both the employer and employee shares which means basically you would pay 15.3% of your employee's wages.  However, if you pay the employee's share of Social Security and Medicare taxes, that amount must be included in his or her total wages reported on their W-2 at year-end.

Wages you pay to your spouse or child under 21 are not subject to the Social Security and Medicare tax.  There are also exceptions for wages paid to parents and employees under the age of 18, but the rules are more complex than what we are going to cover in this article.

Federal Unemployment

If you pay your employee $1,500 or more, you are required to pay federal unemployment tax which is typically .6% of the first $7,000 of wages.  The actual federal unemployment tax rate is 6%, less a credit for state unemployment which is normally 5.4%. 

Federal Income Tax

You are not required to withhold federal income tax from your household employee's wages, but you can agree to do so if your employee requests it.

Childcare Credit

If you are paying a household worker to care for a dependent under age 13 or a dependent incapable of self care so that you can be employed, you may be able to claim an income tax credit of up to 30% of your expenses.  If so, you can include your share of federal and state unemployment taxes along with the employee's wages in your qualifying expenses for the credit.

Wages Subject To Tax

Social Security tax is only applicable to wages up to $127,200 in 2017.  Any wages above that amount are subject to the Medicare portion of the tax (which has no earnings cap and a rate of 1.45%), but not subject to the Social Security tax (of 6.2%).  Also, as mentioned earlier, household wages paid to your spouse or a child under 21 (and in most cases parents and employees under 18) are exempt for Social Security and Medicare taxes.

Amounts paid to household employees that are not considered wages subject to tax include:

  • Meals provided at your home for your convenience.
  • Lodging provided at your home for your convenience and as a condition of employment.
  • Up to $255 a month in 2017 for bus or train tokens (passes) that you give your employee or, in some cases, for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
  • Up to $255 a month to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.
The above has been a very brief summary of a tax area that can be a major headache for people with household employees.  If you have reviewed the general rules outlined above and suspect that you may be running a risk with your own household worker, please contact our office to discuss your options.  Who knows, that Presidential appointment may yet arrive in the mail and we can all watch your confirmation hearing in confidence knowing that your "nanny" situation is well in hand!
 

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