Challenges & Risks of 'After the Fact' Nanny Taxes
There are several challenges involved when a client hires an employee to work in their home, especially when it comes to getting household employment taxes right. Calculating these so-called nanny taxes 'after the fact' may be your biggest risk.
Calculating taxes 'after the fact' means compiling three month’s worth of payroll and tax data, figuring out your client’s tax obligation, and remitting that amount at the quarterly deadline. This includes the employer portion of FICA (Social Security and Medicare) and unemployment taxes (federal and state).
Seems easy enough. So what can go wrong?
Poor payroll records
In my experience working with household employers, they can be notoriously sloppy when keeping track of hours worked by their employees. They’re busy professionals (which is why they hired household help to begin with) and may not pay close attention to timesheets — or even have any type of timekeeping.
Your client may give you bad payroll data for tax filing or they leave it up to you to piece together payroll reports. Either way, you could submit tax forms based on poor record keeping.
Without accurate timesheets, an employee could be underpaid for the hours they worked or may not get the required overtime pay. By law, a household employee must be paid at least minimum wage, which is the highest of the federal, state or local rates.
In addition, they get overtime pay of time-and-a-half for hours worked over 40 in a week. There are a few exceptions to the overtime rule mostly around live-in and companion care workers.
Several states have passed Domestic Workers’ Bills of Rights to provide protections to household employees. These laws could determine days of rest and paid time off. Sick leave and paid family leave laws may also extend to household employees.
Failing to follow tax, wage, and labor laws can get your clients in trouble with various government agencies, open them up to an IRS audit, and expose them to legal action from their employee. Not to mention paying back taxes with penalties and interest.
Since household employers are typically high-net-worth families, taking them to court can be an attractive option for domestic workers.
Making mistakes on payday
Your client could be paying their employee in cash or writing a personal check. However, some states require employers to distribute a pay stub along with wages even if paying electronically. The pay stub includes information like hours worked, pay rate, overtime rate, deductions, withholdings, and more.
States may also determine how often a worker should be paid. In New York, for example, household employees are required to be paid weekly.
Lack of workers’ compensation insurance
Workers’ compensation insurance is required for many household employers and is often overlooked or skipped. However, even if your client is following the law, they can still get tripped up.
Let’s use New York as an example again. A workers’ compensation policy is required if an employee works 40 or more hours a week. Your client hires a nanny for 35 hours a week and decides not to get workers’ compensation coverage.
But one week – and it only takes one week – the nanny puts in 40 hours. That means the family needs workers’ compensation policy. Without accurate payroll records, this could get missed. If the nanny gets hurt on the job and there is no required workers’ comp in place, the family would be on the hook for their employee’s medical costs and lost wages as well as fines and penalties for lack of coverage.
That can easily add up to tens of thousands of dollars. As an aside, even when workers’ compensation coverage is voluntary, a policy may be a good idea to help protect your client.
Who is to blame?
Get nanny taxes wrong for your client and they could point the finger at you and your firm even if you aren’t at fault. They expect expert advice and for you to steer them away from trouble.
You could jeopardize your client relationship – over even lose the client altogether – over the mishandling of nanny taxes or incorrect guidance.
The right way to handle nanny taxes
If you’re handling your clients’ nanny taxes, it’s much easier to do it on a per pay period basis rather than after the fact. That way you can resolve any payroll, tax, labor, or insurance issue right away and keep your client compliant (and happy).
While paper timesheets are cheap and easy, there is still the chance of errors from manual data entry. Your client may want to use an automated timekeeping solution where their employees punch in and out on their mobile device and records are available online.
You also avoid the mad scramble of getting payroll data and calculating taxes with a looming deadline. It can very easy to rush through it and make mistakes.
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Guy Maddalone has more than 30 years of experience in the payroll, human resource, and employment services industries. In 1991, he founded GTM Payroll Services to provide payroll, tax, compliance, and insurance administration for families that hired a nanny or other household employees. Guy...