Nanny Tax Filings are Not Something to Sleep on This Year
A client’s “nanny tax” obligation may seem like something you can do “when you get around to it,” but given this tax season's requirements, that may not be the best option.
With a January 31 deadline to issue W-2s and complications that can arise if your client hasn't been keeping pay records, nanny taxes are something to be dealt with now and not in the middle of your busy season.
Here’s how to get ready to handle your client’s nanny taxes and be prepared for any curveballs that come your way.
Determine if Your Client Owes Nanny Taxes
If your client paid a household employee more than $2,100 in 2019, then they owe 7.65 percent in Social Security and Medicare taxes on those wages. Household workers can include nannies, in-home senior caregivers, housekeepers, chefs, chauffeurs, estate managers, and others.
Full-time workers will easily clear this threshold and most part-timers will too. But keep in mind that after-school caregivers, summer nannies, and senior caregivers who worked for a short time can also exceed $2,100 in wages without much effort.
Also, if your client paid an employee $1,000 or more in any calendar quarter, they’re liable for federal (FUTA) and state (SUI) unemployment taxes. FUTA is six percent on the first $7,000 in cash wages paid to a household employee. SUI rates vary by state and you can reduce a client’s FUTA rate based on their state contributions.
Confirm Employee Wages and Hours Worked
Ideally, your client has been tracking the employee’s pay and you've been remitting household employment taxes on a quarterly basis. The employee should have been paid at least minimum wage and received overtime pay according to applicable wage laws.
Typically, overtime is time and a half for hours worked over 40 in a seven-day workweek. However, state laws may vary and rules for live-in employees could differ. Household employees must also be paid hourly according to the Fair Labor Standards Act and shouldn’t be considered salaried workers.
If your client hasn’t been keeping accurate records of hours worked, then you’ll need to make sure the employee has been paid legally in accordance with minimum wage and overtime rules. This is an important step in the process and not being paid properly for hours worked is a big reason why families get sued by disgruntled workers.
Prepare Form W-2 For the Employee
Just like employees in the traditional workforce, household workers need to receive Form W-2 by January 31, 2020. It’s a good idea for you or your client to confirm the employee’s correct legal name, Social Security number, and address before issuing Form W-2. That can eliminate some problems when the employee files their tax return.
Don’t try to classify the employee as an independent contractor and issue them a 1099. This is considered felony tax evasion because you’re shifting the entire tax obligation (employer and employee) to the worker and that can land your client in trouble.
The IRS considers household workers to be employees and not independent contractors. That’s because your client controls the employment relationship by determining when the employee works and how they should do their job as well as providing the tools and equipment to do the job.
File Form W-2 and Form W-3 SSA
Also by January 31, 2020, you’ll need to file Copy A of Form W-2 and Form W-3 (Transmittal of Wage and Tax Statements) with the Social Security Administration. All employers, including families with household help, need to file Form W-3 to report their employee wages and tax withholdings.
Even if your client has just one employee, you’ll still need to file Form W-3. You can mail these forms or file them electronically.
Apply Employee Wages to the Child and Dependent Care Tax Credit
You’re likely familiar with the Child and Dependent Care Tax Credit (Form 2441). Your client may be able to claim a portion of their employee’s wages to this credit. This would apply to nannies and senior caregivers and companions.
On Form 2441, you’ll provide the caregiver’s name, address, and Taxpayer Identification Number (in the case of household employees, this would be their Social Security Number). Some states may also offer a similar credit for child and/or dependent care.
Get Familiar With Schedule H
Unless you're experienced with clients who have hired household help, you may be less familiar with Schedule H (Household Employment Taxes). This form gets filed with your client’s personal tax return. On Schedule H, you’ll report the household employment taxes – Social Security, Medicare, and federal unemployment taxes – that are owed for the tax year, enter the cash wages paid to the employee, and calculate what your client owes in nanny taxes.
You’ll also need to know how much your client contributed in state unemployment taxes as you may be able to significantly reduce the amount owed in FUTA taxes. Finally, you’ll include the amount owed in nanny taxes from Schedule H to your client’s Form 1040.
If your client is using a comprehensive nanny payroll service, Schedule H – along with Form W-2 and Form W-3 – may already be prepared for you.
Get Started Now
Tracking down employee hours and pay and determining what is owed or has already been paid in taxes can be tedious and time-consuming. It’s not something you want to take on in the middle of tax season. Get started now and, as a resolution for 2020, make sure you and your client are keeping accurate records of employee wages and remitting household employment taxes quarterly using Form 1040-ES. You’ll thank yourself this time next year.
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...