Courtesy: HomeWork Solutions Inc., February 2008

 Go to Complete FAQ at the 4nannytaxes.com Site

1. I have a domestic (nanny, elder care giver, housekeeper) working in my home. What taxes do I need to pay?
2. What taxes does my employee pay?
3. How are the employee's payroll taxes paid?
4. How often do I need to pay these taxes?
5. Congress simplified the "nanny taxes." What does that mean to me?
6. My domestic (nanny, elder care giver, housekeeper) wants to be treated as a "contractor." Can I do that?
7. Do I need to pay minimum wage?
8. What about workman's compensation and disability insurance?
9. Am I required to hire U.S. citizens?
10. My employee is not a legal resident. What should I do about employment taxes?
11. What is "New Hire Reporting"?
12. I have heard that I can get a personal tax break for child care? Is that true?
13. Is health insurance for my domestic (nanny, elder care giver, housekeeper) taxable?
14. How do we handle the taxes if we share a nanny with another family?
15. What may happen if I don't pay the taxes?
16. Do the rules ever change?

1. I have a domestic (nanny, elder care giver, housekeeper) working in my home. What taxes do I need to pay?
In general, the Internal Revenue Service requires payroll tax filings by a domestic employer who pays a household employee more than $1600* cash wages in a calendar year. These payroll tax obligations that may include:

• Social Security & Medicare Taxes (7.65% of Gross Wages) [FICA taxes]**
• Federal Unemployment Tax (FUTA) (0.8% of Gross Wages or less in Most Circumstances)
• State unemployment and disability insurance taxes levied on the employer.
• Advance payment of the earned income credit for eligible employees.

(* Threshold $1600 in 2008. The $1500 threshold applies to 2006 and 2007 household payroll! Wage test is $1400 for years 2003 - 2005, $1300 for 2001 & 2002, $1200 for 2000, $1100 for 1998 & 1999, years 1995 - 1997 were $1000)
(** The FICA taxes are shared between employer and employee. Each party contributes 7.65%. If the family fails to collect this tax via payroll deductions from the employee, the family will be liable for both the employer and employee portions of the tax or 15.3% of gross wages.)

2. What taxes does my employee pay?
Your employee contributes to or pays:

• Social Security & Medicare Taxes (7.65% of Gross Wages Collected and Remitted by Employer)
• Employee Disability/Unemployment Taxes where required.
• Federal/State Income Taxes

The employer is soley responsible for the remittance of the Social Security and Medicare taxes.

Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer.

3. How are the employee's payroll taxes paid?

The household employer is required to collect the employee's (nanny, housekeeper, etc.) contribution to Social Security and Medicare taxes. Should you fail to collect, you remain responsible to remit these taxes for the employee.

Deducting federal income taxes and most state income taxes is optional. If income taxes are not withheld by the employer, then the employee is required to make periodic payments of any amounts due.

Most household employers with a full time staff member offer to deduct income taxes for the employee from his/her payroll. This is a convenience to the nanny or other household staff, relieving them from the need to make quarterly estimated tax payments on their own. Families with occasional or part time staff, such as a weekly housekeeper, in general do not deduct income taxes from the employee's payroll.

4. How often do I need to pay these taxes?

The federal and state filing schedules are NOT synchronized. Additionally, not all states have the same reporting schedule.

Federal Employment Taxes: Employers of domestic workers must, at a minimum, make annual payments for Social Security, Medicare and Withheld Income Tax (if applicable), as well as Federal Unemployment Tax (FUTA). This filing is incorporated with the family (employer's) annual Federal Income Tax Return, reported on Form 1040 Schedule H.

Federal employment taxes are added to the employing family's total annual Federal tax liability. They are subject to underpayment penalties just like income taxes. The possibility of penalties causes most employers of full time household workers to make quarterly payments to the IRS to offset this liability.

State Reporting: States collect unemployment insurance taxes, maintain records of wages paid to individual employees for management of the state's unemployment insurance compensation system, collect state income taxes where applicable, and may collect other miscellaneous wage based taxes as authorized by the state legislature. Household employers generally must complete wage reporting forms on a quarterly basis. Generally, state unemployment taxes and withheld state income taxes must be paid on a quarterly basis.

Other Reporting You are required to give your employee a wage and tax statement (Form W-2) no later than January 31. All Forms W-2, along with a summarizing Form W-3. are sent to the Social Security Administration no later than February 28.

HomeWork Solutions' clients are individually appraised of their specific reporting obligations and are provided the appropriate paperwork on a schedule to match their obligation.

5. Congress simplified the "nanny taxes." What does that mean to me?

Congress legislated significant revisions to the "Nanny Tax" in October 1994. The remittance of the FEDERAL nanny payroll taxes was incorporated in the employing families' annual Form 1040 filings. Most payments to household workers under 18 years of age are now exempted. The wage payment that triggers an obligation to make "Nanny Tax" filings was increased and indexed for inflation, the first such change since the 1950's.

The most important change requires household employers to disclose the wages paid to household staff on the employer's personal income tax return. Failure to disclose this information will compromise the integrity of the personal tax return, which is signed and submitted under penalties of perjury. This dramatically raised the risks to the employing families for non-compliance with the nanny taxes. The IRS has no statue of limitations when auditing and collecting taxes if you file false/fraudulent returns.

Please note that this 'simplification' only affects your FEDERAL employment tax obligations. Most state reporting requirements remain on a quarterly schedule.

 Risks of Nanny Tax Non-Compliance

6. My nanny (domestic) wants to be treated as a "contractor." Can I do that?

The simple answer is NO. A nanny, housekeeper, or home health aide that you hire directly is your employee under common law. It does not matter how many hours they work, whether the position is permanent or temporary, or how much you pay the worker.

Under common law, a worker who performs services for you is your employee if you can control what will be done and how it will be done. It does not matter whether you give your nanny great latitude, but rather that you have the right to control the work. It does not matter if the work is performed on a full time or part time basis. It does not matter whether the worker lives with you or not. It does not matter is he/she is paid hourly, daily or a salary. It does not matter how the employee refers to herself or how you refer to him/her in an employment contract. The household worker is your employee and you are generally obligated for all payroll tax filings and remittances.

The IRS articulates strict guidelines which differentiate employees and independent contractors to further eliminate confusion. Nannies and other domestics are generally considered employees (Refer to IRS Publication 926: Household Employers Tax Guide). It does not matter how the employee refers to herself or how you refer to her in an employment contract. You are obligated for all payroll tax filings and remittances if you pay the worker $1500 or more in the calendar year (2006 & 2007 threshold). The IRS has no statue of limitations when auditing and collecting taxes if you file false/fraudulent returns.

The IRS has reaffirmed this stance twice in 1999. In two private letter rulings (PLR 199923014 and 199923015) the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status.

 MORE INFORMATION: Nanny - Employee or Contractor

7. Do I need to pay minimum wage? What about overtime?

Domestic employees have been covered by the Fair Labor Standards Act (FLSA) since 1974.

The FLSA stipulates that domestics (household workers) must be paid at least the Federal minimum wage. The minimum hourly rate $5.85 (effective 7/24/07); rising to $6.55 per hour effective July 24, 2008; and to $7.25 per hour effective July 24, 2009. If your state imposes a minimum wage higher than the Federal minimum, the state amount is in effect.
 Minimum Wage by State

Overtime compensation coverage hinges on whether the household worker lives in (on the premise) or lives out (come-and-go). You are required to pay a domestic employee who lives out overtime (for hours above 40 in a week). Overtime is one and one-half times the normal hourly rate. Live-in employees must be paid for every hour they work but are not automatically entitled to the overtime differential.

Hours worked include the following:

• All hours on duty, including meal time if the employee is required to remain at the premises during meals.
• Nap time
• Time when children are in school IF nanny is required to be "on call" for any emergencies such as early dismissal, child sick at school, etc.

In general, hours worked includes all time that the employee is required to be at the employer's home and all time that the employee is required to be 'on call' in the course of his/her duties.

These rules are governed by the  Fair Labor Standards Act. Please familiarize yourself with these rules if you are considering a pay rate that does not meet the FLSA standards articulated above.

 Free Tax Calculator Tools
 More Information: Minimum Wage by State
 More Information: Nanny Overtime and Minimum Wage Rules

8. What about worker's compensation and disability insurance?

SUMMARY: State insurance regulations define who is required to carry worker's compensation and disability insurance. The rules vary by state. We recommend discussing your local regulations with a licensed insurance broker.

Worker's Compensation Insurance is protection mandated under state law for a worker and his or her dependents against injury and death occurring in the course of employment. It is not health insurance, and it is not intended to compensate for a disability other than disability caused by injury arising out of employment.

The purpose of a worker's compensation system is to provide financial and medical benefits to the victims of 'work-related' injuries and their families regardless of fault. The cost of this insurance is borne by the employer. Insurance premiums are determined by the number of employees, their annual payroll, and the type of work they do.

This insurance may be purchased through a licensed insurance broker and/or a state insurance fund. This is a policy of insurance and not a payroll tax.

 US Department of Labor Survey of Worker's Compensation Rules as they apply to domestic service.

 More Information About Workers' Compensation Insurance

 USA Today July 1997 Worker's Comp Information

9. Am I required to hire U.S. citizens?

SUMMARY: You may legally hire a U.S. citizen, an alien lawfully admitted for permanent residence, or an alien with a valid work permit. You are required to verify your candidate's employment eligibility using  Form I-9. Aliens with a valid work permit are eligible for and should have a valid Social Security Number.

A lawfully admitted alien with documents from ICE indicating work authorization (i.e., DS-2019, I-20, I-551, etc.) may apply for and be issued a Social Security Number. Their Social Security Card will typically be marked "VALID FOR WORK ONLY WITH DHS AUTHORIZATION".

The Social Security Administration will issue cards to aliens not authorized to work if they are lawfully admitted to the US and need the number for a valid non-work reason (as determined by Social Security Administration). The card will be marked "NOT VALID FOR EMPLOYMENT" to show that the individual can not work. If the alien does work, the Social Security Administration is required to inform ICE.

SAMPLE SOCIAL SECURITY CARDS
UNRESTRICTED	VALID FOR WORK ONLY WITH DHS AUTHORIZATION	NOT VALID FOR EMPLOYMENT

Social Security cards issued after April 2007 will be formatted slightly differently, with a separate line for first and last names. Additional anti-tampering measures will be taken. Previously issued cards WILL remain valid.

Illegal Immigration: Current Issues

The issue of illegal immigration and a citizenship path or amnesty for undocumented foreign workers in the United States is a major political issue at this time. There are proposals before Congress to reform our immigration policy, and perhaps our border security, that will have dramatic consequences to the many employers, including families, who currently employ undocumented workers.

Many households employ illegal immigrants as nannies, housekeepers, groundskeepers, etc. Some of these households already comply with employment tax reporting; the majority do not. All of the various proposals being discussed in Washington include either a Guest Worker program, an amnesty program with a citizenship path for illegal immigrants already working in the U.S., or both. What does this mean to the household employer?

It is expected that all applications for immigrant legalization will include a detailed examination of the immigrant's background, including their employment history while in the U.S. Immigrants applying for a "Z" visa, Green Card or other legalized status will be required to document employment and tax compliance. All plans include an examination of tax return records going back a minimum of 3 years. The illegal immigrants will be highly incented by the promise of legal status, and it is expected there will be significant pressures on current employers who have been paying these immigrants 'under the table' to come clean and catch up on tax payments so the immigrant can take advantage of the legalization program.

Families who decide to hire or retain their illegal immigrant employees are able to comply with all of the current payroll tax reporting requirements, even if the worker does not have a valid Social Security number or US Work Authorization. The Internal Revenue Code prohibits the sharing of taxpayer information with other government agents - see THE PRIVACY ACT OF 1974 5 U.S.C. § 552a. HomeWork Solutions' staff can assist employers in this tax compliance, including preparation of back tax returns. Remember, tax compliance by illegal immigrants does not confer work authorization, but non-compliance will make them ineligible for future legal status.

'Green Card' Applications - Foreign Domestic Workers
 Important April 2005 Update.

10. My employee is not a legal resident. What should I do about employment taxes?

The Internal Revenue Code maintains that the immigration status of your nanny or other employee has no bearing on your obligation for employment taxes.

The IRS requires that workers ineligible for Social Security Numbers file form W-7 to request an Individual Taxpayer Identification Number (ITIN). This number will be used on all tax reports and returns, including Form W-2. The IRS is currently prohibited from sharing this information with Immigration and Customs Enforcement [ICE] (formerly Immigration and Naturalization Service [INS]) by law - see THE PRIVACY ACT OF 1974 5 U.S.C. § 552a).

Non-payment of taxes is a leading reason for denial of an alien's immigration petition. Immigration and Customs Enforcement (ICE) can consider the failure to file an income tax return, if a person earned enough to be required to file, as proof that the noncitizen doesn't have the "good moral character" required of applicants for US citizenship. Failure to file income tax returns or an improperly prepared tax return can cause problems when the permanent resident files for US citizenship or when a US citizen or permanent resident tries to help family members immigrate.

Illegal Immigrant Nannies in the News

The issue of illegal immigration and a citizenship path or amnesty for undocumented foreign workers in the United States is a major political issue at this time. There are proposals before Congress to reform our immigration policy, and perhaps our border security, that will have dramatic consequences to the many employers, including families, who currently employ undocumented workers.

Many households employ illegal immigrants as nannies, housekeepers, groundskeepers, etc. Some of these households already comply with employment tax reporting; the majority do not. All of the various proposals being discussed in Washington include either a Guest Worker program, an amnesty program with a citizenship path for illegal immigrants already working in the U.S., or both.

What does this mean to the household employer?

It is expected that all applications for immigrant legalization will include a detailed examination of the immigrant's background, including their employment history while in the United States. Immigrants applying for a Green Card or other legalized status will be required to document tax compliance. All plans include an examination of tax return records going back a minimum of 3 years. The illegal immigrants will be highly incented by the promise of legal status, and it is expected there will be significant pressures on current employers who have been paying these immigrants 'under the table' to come clean and catch up on tax payments so the immigrant can take advantage of a legalization program.

11. What is "New Hire Reporting"?
Effective January 1998, Federal welfare reform legislation (Personal Responsibility and Work Opportunity Act of 1996) requires all employers to report information on all newly hired workers within a specified period, generally 2 weeks, or incur a penalty. Each state has designated an agency responsible for the collection of data and enforcement of the requirement. These laws are intended to expedite enforcement of child support orders.

Follow this link for more information on New Hire Reporting.

12. I have heard that I can get a personal tax break for child care? Is that true?
There are two popular strategies that families use to minimize their personal income taxes. Many families can utilize a flexible spending plan (cafeteria plan) offered by their employer for child and dependent care expenses. Your human resources department can provide you with plan details. Another strategy is the Child Care Credit available to many parents. This credit can directly reduce the parent's income taxes by between $600-$1,440 a year.

13. Is health insurance for my nanny taxable?
 Health insurance may be provided as an employee benefit. The employer generally pays the premium directly to the insurance carrier and the premium is not taxed as income to the employee.

 More Information: Health Insurance as Nanny Benefit

14. How do we handle the taxes if we share a nanny with another family?
Generally, when you share a nanny with another family, you both become employers. Presuming that you each pay the nanny for the work performed for your individual family, each employer is responsible for withholding payroll taxes and the periodic remittances of payroll taxes.

15. What may happen if I don't pay the taxes?
Failure to report domestic wages paid after January 1, 1995 will compromise the validity of your personal income tax return. Additionally, there is no statue of limitations on the failure to report and remit federal payroll taxes. You are most likely to be "caught" when a former employee files for unemployment or social security benefits. Employers are generally required to pay back taxes, penalties and interest charges, and usually professional fees for an accountant and/or attorney. HomeWork Solutions can assist employers becoming current with back tax obligations.

 More Information: Penalties for Nanny Tax Non-Compliance

16. Do the rules ever change?
Yes. Many rule changes resulting from the Federal "simplification" are still being defined. For example, in 1997 all household employers are required to submit Form W-3 to the Social Security Administration for the first time. Effective in 1998, Federal household employment taxes are subject to penalties if not paid in periodically by the employer, either by submitting quarterly payments or adjusting withholding on the employer's paycheck. HomeWork Solutions' professionals keep current with these changes and notify clients accordingly.

For More Information contact HomeWork Solutions, Inc.
at 1-800-NaniTax or e-mail and submit a question.