Taxpayers who hire nannies, gardeners or caretakers for elderly parents have until Jan. 31 to file tax paperwork for their household employees or face interest payments and fines from the Internal Revenue Service.

The “nanny tax,” which made headlines when President Clinton nominated Zoe Baird for attorney general, once again became an issue late last year when President Bush's nominee to head the Department of Homeland Security, former New York City police commissioner Bernard Kerik, withdrew his name after being criticized for failing to pay taxes to a child-care provider.

The law covers employers who pay household employees $1,400 or more in 2004, even if the worker does not live in the employer's home, according to the Sacramento Business Journal.

You don't have to withhold income tax from a household worker's pay unless the employee requests it, Bankrate.com reported. Generally, the tax is divided between the boss and the worker as taxes withheld throughout the year. Each pays 6.2 percent of income toward Social Security and 1.45 percent for Medicare.

Household employers must give workers an IRS W-2 Form

by Jan. 31. Follow this up by reporting 2004 household help tax payments on a Form W-3, to be filed with the Social Security Administration by Feb. 28. Household employers also need an EIN, a 9-digit ID number issued by the IRS.

Lawmakers simplified the nanny-tax law in the mid-1990s, which may have increased compliance. The IRS processed 313,836 nanny-tax forms in 1997, which was 24 percent of all individual income-tax returns and up from 299,099 forms in 1996. Since then, however, the number of filings continues dropping.

The IRS received 239,810 federal tax returns in 2003 with a nanny tax form attached - that's a fraction of 1 percent of all individual income-tax returns filed in 2003, the Sacramento Business Journal reported.

California residents have another layer of requirements to contend with. Bruce Mizer, a Sacramento financial consultant with Mizer & Associates, told the Business Journal that the state also requires payment of unemployment insurance, state disability insurance and quarterly income tax payments. If the household employee lives in the home of the employer, two-thirds of the cost of lodging and meals is added to wage earnings.

IRS Spokesman Bill Steiner said the nanny tax doesn't typically spark audits. "It doesn't come up as frequently as, say, an independent contractor, or a self-employed businessperson or questions about expensing," he said. "It's not a lot of money, so people don't usually get targeted just for that."