The Nanny Tax–It’s Complicated, and it’s not just for Nannies

by Tim Marshall 21. December 2015 13:41

As the prevalence of households using in-home assistance increases, it is important to be reminded of the repercussions of the “Nanny Tax.” For instance, as our senior citizen population grows, more and more families are employing senior caregivers. If you hire a caregiver that is paid more than $2,000 per year, the IRS says you may be a household employer with the corresponding payroll and tax responsibilities – the Nanny Tax.

Nanny tax compliance requirements can vary by state. For example in Pennsylvania the household employer must: withhold some taxes, such as unemployment ; pay the employer’s portion of Social Security, Medicare, and Federal and State unemployment taxes; file some quarterly tax forms; and, prepare and file some year-end forms including the W-2.

The employer vs. contractor distinction is very important. Families that misclassify a household employee as an independent contractor (by providing the employee with a Form 1099 for filing taxes) can be charged with tax evasion, and be subject to penalties, interest, employer back taxes and employee FICA taxes. Apart from tax laws, there are labor regulations that require strict adherence as well, including workers’ compensation insurance, minimum wage and overtime compliance, and many others. Nationally, the lack of compliance with household employees has caused the IRS and the Department of Labor to collaborate to increase enforcement, so the issue is not going away.

If you have household employees that may be subject to these regulations, we urge you to discuss it with a tax professional. In addition to the peace of mind that comes with compliance, a tax adviser might also discover some favorable tax treatments, such as with Child or Dependent Care Tax Credits. We’re here to help!

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