Paying Nanny Taxes: Not Just for Cabinet Nominees

paying nanny taxes not just for cabinet nomineesFollowing the presidential election in November, new potential Cabinet members have been going through the nomination process in the Senate. Two of those nominees have come under fire for issues relating to the hiring and paying of household workers. President Trump’s choice for White House budget director, Mick Mulvaney, failed to pay more than $15,000 in household payroll taxes, jeopardizing his nomination to the post. Mulvaney needs to pay state taxes, penalties, and interest, despite saying he settled his federal tax bill. President Trump’s choice to lead the Labor Department, Andrew Puzder, has admitted that he employed an undocumented immigrant to work in his home, saying he has paid all back taxes to the IRS and the state of California. He claims that once he found out she was not legally permitted to work in the U.S., he terminated the housekeeper.

Of course this is not the first time we’ve heard of this issue; the subject of nanny taxes has come up with nominees for Cabinet posts for Bill ClintonGeorge W. Bush, and Barack Obama. But while these cases are very high-profile and make news headlines, paying nanny taxes is not just for Cabinet nominees. It’s the law for anyone who pays a household worker more than $2,000 (2017) in a year, and just because a family isn’t answering questions in front of a Senate panel, there are many ways to get caught paying an employee illegally.

One of the most common ways employers who aren’t paying legally are exposed occurs when their employee gets injured on the job. In this case study, not having workers’ compensation coverage can be extremely costly:

A household employer living in New York State hired a nanny to care for his children, but ignored the state’s workers’ compensation coverage requirement. One day the nanny slipped and hurt her back. The doctor asked how she got hurt, and she relates that it happened while she was working. This leads to a workers’ compensation claim. New York is one of the many states that require household employers to carry workers’ compensation insurance for their employees. Of course, the workers’ comp board in New York had no record of her even being employed because the employer hadn’t paid her legally. So not only was the household employer penalized $37,000 by the New York Workers’ Compensation Board for not having a policy, the New York State Department of Tax and Finance and the IRS got involved, requiring the employer to open their wallet again to cover the back taxes and penalties incurred by not paying their employee legally.

Another common way the government discovers an employer is not paying their employee legally is when that employee leaves the job and files for unemployment insurance. But that can lead to the state’s labor department having no record of the employee holding a job. Why not? Because the employer hasn’t been paying unemployment insurance. This immediately raises a red flag and the employer can expect a call from the state, with significant fines likely to follow.

A third way employers paying “off the books” are exposed is when their employee decides they want to start being paid legally. For example, the two parties originally agreed on not withholding taxes, but later the employee started to notice what she was missing; she can’t apply for a loan or obtain credit because she has no legal work history; she isn’t saving any money for retirement and isn’t eligible for Medicare or Social Security benefits; and she can’t apply for unemployment insurance if she leaves the job. She wants to start getting these benefits, and if the employer does not agree to start paying legally, she can sue the employer, resulting in paying back taxes and penalties once the illegal working relationship comes to light, along with court and attorney costs.

A final common way for an employer to be exposed for not paying nanny taxes is in the case of an audit by the IRS or state tax agency. The audit could be a result of one of the above examples, or if there is another reason for an audit to be conducted, the non-payment of nanny taxes would be discovered, leading to far more fines and legal troubles than the original reason for the audit would have generated.

The bottom line is that it’s illegal to avoid paying nanny taxes, whether you’re a nominee for a Cabinet position, or you’re a regular family from Anytown, U.S.A. that hires a household employee.

Read more information on the benefits for both employers and employees on paying nanny taxes, or contact us at (518) 348-0400.

Register for National Nanny Training Day 2017!

national nanny training day 2017Calling all nannies! Registration is now open for our annual educational event, National Nanny Training Day.

We hope you can join us for this FREE event. You’ll hear from a management consultant about professionalism in the workplace; see a presentation on how nannies should be prepared for, react to, and calm the children in her care in the event of an emergency; learn the benefits of being paid on the books; receive CPR training; and more! Lunch will be provided as well, along with raffle prizes and great giveaways. We know this year’s event is going to be bigger and better than ever!

CPR will be offered for those of you who did not attend last year. (If you participated last year, your certificate is good for another year.)

Did we mention it’s FREE? Click here to register – don’t miss out on what is always a fun and educational event!

Nanny Taxes Made Easy in 13 Steps

nanny taxes made easy in 13 stepsThis is the time of year when many household employers are scrambling to pull together 12 months worth of pay and tax information so they can issue their employee a W-2, submit Form W-3 to the Social Security Administration and begin preparing Schedule H to file with their personal tax return. This is especially true for 2017 nanny taxes since this is the first year that the deadline to submit forms W-2 and W-3 has been moved up to January 31.

It can be overwhelming on top of all of the other tax season aggravations and headaches.

If this sounds like you, make a commitment now to hassle-free 2017 nanny taxes. By following these 13 steps, you won’t have a mad scramble to get your forms submitted on time. In the long term, these steps will keep you in line with tax, wage and labor laws that apply to household employers. This will help reduce the risk of fines and/or penalties for noncompliance.

  1. Purchase workers’ compensation insurance - it’s required in New York.
  2. Adhere to the New York minimum wage requirement ($9.70/hour).
  3. Pay overtime of one and half times your employee’s hourly rate for all hours worked above 40 in a week. This is federal law.
  4. Follow all applicable tax, wage and labor laws in your state including the New York Domestic Workers’ Bill of Rights.
  5. Read and respond to government notices or alerts.
  6. Monitor changes to tax, wage and labor laws that could potentially affect household employment.
  7. Prepare and distribute pay stubs (even if paying by direct deposit). Include: employer name and address, employee name, pay period start and end dates, check date, check number, gross earnings, total deductions, net pay, current and YTD payroll information, PTO accruals, and withholding allowances (based on employee’s W-4).
  8. File and remit quarterly state employment taxes.
  9. File and remit quarterly federal taxes using Form 1040-ES.
  10. Prepare and distribute Form W-2 to your employees by January 31 (for previous year’s taxes and wages).
  11. Prepare and file Copy A of Form W-2 and Form W-3 with the Social Security Administration by January 31.
  12. Prepare Schedule H and file with your federal income tax return (Form 1040).
  13. Keep records in a safe place for at least seven years.

Interested in learning more about getting your 2017 nanny taxes done right? Contact us at (518) 348-0400.

National Nanny Training Day 2017

national nanny training day 2017

Trump Moving Forward with Child Care Tax Plan

Trump Moving Forward with Child Care Tax PlanAs we posted in late 2016, President-elect Donald Trump has laid out plans to reduce taxes for those families paying for child care. Our friends at GTM Payroll Services now have an update on his plans and how they could impact household employers.

As Inauguration Day draws near, we’re getting a clearer picture of President-elect Donald Trump’s priorities when he takes office. Reducing child care costs was a centerpiece of Trump’s proposed tax plan during the campaign. It remains a focal point as he seeks Congressional support for his proposals.

“I am delighted to see that we’re looking at options for tax credits, tax incentives, ways for moms and dads to be able to write-off this child-care cost,” Rep. Marsha Blackburn, R-Tenn., recently told Jake Tapper on CNN’s “State of the Union.”

Blackburn has been working with Trump’s daughter Ivanka on child care legislation.

Child Care Discussions with Congress

Ivanka has already met with members of Congress. She discussed her father’s proposal for an above-the-line deduction that would be capped at the average cost of child care for the age of the child in the taxpayer’s state.

Families making less than $500,000 annually and single parents making less than $250,000 a year would be eligible for the deduction.

All families – regardless of income level – would also be able to establish Dependent Care Savings Accounts. These would be set up to help pay for the child care of specific individuals, including unborn children.

“You want to know your children are well cared for,” she said. “And there ought to be a way to have a savings account that you can start saving from on day one to help with those costs, because you know, it’s important to your life/work balance and the life of your family,” Blackburn said.

Impact on Legal Employment

Trump’s proposed child care deduction could also encourage more domestic employers to pay their nannies “on the books.” They would obviously need to report the amount they pay their employee to take advantage of the deduction.

This could then increase the amount collected in federal income taxes from nannies (whose wages are now not being reported) and the amount paid into Social Security and Medicare.

It’s estimated that there is more than $2.1 billion in unpaid federal income taxes and $4.6 billion missing in Social Security and Medicare contributions from employees who are paid “under the table.”

 

For more information, contact us at (518) 348-0400.

Save Your Career Opportunity by Paying Nanny Taxes

paying nanny taxesIt seems like the career opportunity of a lifetime. The incoming president’s transition team is considering you for a position in his cabinet or a senior-level appointment in a government agency or even an ambassadorship.

Or…it’s the chance you’ve waiting for your entire career. You’re being considered for partner in your firm or a C-level position in a major corporation.

In either scenario, you’ve worked hard. You’ve sacrificed. Your professional resume is impeccable. You’ve cleared the background checks. You’re cruising through the vetting process.

Then come the questions that make your palms sweat, create a lump in your throat and knock you off stride:

“Have you ever hired a nanny, in-home caregiver, housekeeper or any other individual to work in your home? If so, did you pay the proper taxes?”

For jobs that require a government security clearance, you will be required to fill out SF-86 (Questionnaire for National Security Positions). That form asks, “In the past seven (7) years have you failed to pay Federal, state, or other taxes when required by law or ordinance?”

As it turns out, you hired a nanny to look after your young children as you and your spouse both work. You pay the caregiver under the table because it’s easier, and who has time to manage payroll and taxes? The nanny doesn’t mind. There’s more money is her paycheck. Plus, how was anyone going to find out?

This situation likely plays out more often than you think, considering just an estimated 10 percent of household employers pay their workers legally.

From “Nannygate” to Today

Robert Rizzi, a partner and chair of the tax group at Steptoe & Johnson LLP, guides political appointees through the vetting process. He recently told Bloomberg BNA that he has had clients under consideration for nomination by the Obama administration who were immediately disqualified for failure to pay their nanny taxes.

Going back a few years, Zoë Baird was the first high-profile individual to fall victim to this mistake. She was President Clinton’s first choice for Attorney General. However, Baird withdrew her nomination when it came to light that she and her husband had hired illegal immigrants to serve as chauffeur and nanny. They also failed to pay the proper employment taxes on the workers.

The controversy became known as “Nannygate” and led to changes in the way household employers report their taxes. Congress reacted by passing a law that raised the minimum annual pay that triggers tax payments and gave birth to Schedule H. This form, which reports household employment taxes, is filed with a domestic employer’s personal tax return.

Now nanny taxes is one of the “heavily scrutinized” issues that nominees can expect to confront during the vetting process.

The past eight years has seen an increased scrutiny of tax returns, according to Rizzi. He calls it a “hot-button tax issue” for nominees. Problems with Timothy Geithner arose during his vetting process for the Treasury secretary position under President Obama. He hadn’t paid Social Security and Medicare taxes on his domestic workers for several years. Geithner subsequently paid his back taxes and filed amended returns. He was confirmed shortly after President Obama took office. Former Sen. Tom Daschle wasn’t so fortunate. He was forced to withdraw his nomination for Health and Human Services secretary because of several tax problems, including failure to pay income taxes on his driver.

How to Save Your Career Opportunity

What can you do if you’ve been paying your domestic worker off the books?

First, take care of your back tax obligations as soon as possible. Now is a great time to deal with this especially if you just hired a household employee in the past year. Our affiliate GTM Payroll Services offers back tax work at reasonable rates. They can help you correct issues and become compliant moving forward.

Or maybe you’re unsure if you’re doing it right and would rather not find out at an inopportune time. Call GTM at (800) 929-9213 for a free, no-obligation consultation and they’ll review your specific situation and help you determine your compliance and next steps.

Your career opportunity deserves it.

Year-End Tax Planning for Household Employers

year-end planning for household employersThe end of 2016 is only about 2 weeks away, so it’s important that everything is in order to ensure there are no surprises when it comes time to pay your nanny taxes next year. We recommend not putting off or ignoring your 2016 year-end tax planning. It’s important to look at your finances and think about any changes you will be making for the rest of this year and into early 2017. Some things to consider include:

  • Adding/decreasing your employee’s hours during the holiday season
  • Awarding a year-end bonus
  • Adjusting salary for 2017
  • Making note of the new minimum wage in New York
  • Vacation pay for the holiday season

The domestic employee coverage threshold amount will stay at $2,000 for 2017; this means that you are required to pay taxes if you pay a nanny at least $2,000 for the year. Make sure you keep accurate records of any changes you make, along with any changes to any federal or state tax and wage laws.

Contact us at (518) 348-0400 if you have any questions or need more information.

6 Reasons to Pay Your Nanny Legally

6 reasons to pay your nanny legallyIt may seem easy to just cut a check or hand over cash to your nanny each week for her services. You don’t have to deal with tax calculations, forms and the hassles that come with being an employer. Your nanny may feel the same way. However, that’s a roll of the dice – for both you and your nanny – and one that you may not be able to afford. Here are 6 reasons to pay your nanny legally:

1. Your Nanny Files for Unemployment

For whatever reason, you and your nanny part ways. Perhaps it didn’t work out or your kids are now in school so you don’t need a full-time caregiver. She now needs to find a new job and files for unemployment benefits to help during the transition period. But your state’s labor department has no record of your nanny holding a job. And why would they? You haven’t been paying unemployment insurance. A red flag is immediately raised and you can expect a call from your state with a hefty fine soon to follow.

2. Your Nanny Gets Hurt on the Job

Any number of injuries or illnesses can happen on the job. Some can be serious enough to send your nanny to her doctor’s office or even the hospital. The doctor asks how she got hurt. In retelling her story, she says it happened while she was working. Now there’s a workers’ compensation claim. You live in one of the many states that require household employers to carry workers’ compensation insurance for their employees. Of course, the workers’ comp board in your state has no record of her even being employed because you haven’t paid your nanny legally. Again, expect to be contacted by your state and prepare to open your wallet.

Workers’ compensation helps restore your nanny’s lost wages and cover some of her medical bills. Even in states where workers’ comp may not be required, it’s a good idea to have this protection.

3. You’ve Hired a “Less than Professional” Nanny

Nannies who take their jobs seriously likely won’t take your position if you plan to pay them under the table. They know the benefits of being paid on the books even if it means a little less in their paychecks each week. They have verifiable incomes and legal employment histories. They can receive unemployment, Social Security, and Medicare benefits. And now, the Affordable Care Act requires everyone to have health insurance or pay a fine. By being paid legally, your nanny may qualify for a subsidy when purchasing coverage through a health insurance marketplace.

This is the type of nanny you want looking after your children. Your chances of having a long-term relationship with a “professional” nanny are much greater than with one where joining together in tax fraud is the beginning of your association.

4. Your Nanny Sues for Not Withholding Taxes

Let’s say you and your nanny decide to pay off the books. She’s enjoying the extra money in her paycheck and so far you haven’t had any issues. However, she starts to understand what she’s missing. She can’t get credit or apply for a loan as she has no work history. She realizes she’s not saving money toward retirement. She sees other nannies enjoying these benefits. Now she wants to be part of it. So she sues you for not following the law.

5. You Incur Fines and Penalties for Not Following the Law

There are a number of wage and labor laws and regulations that domestic employers need to follow. Some may be bundled into the New York Domestic Workers’ Bill of Rights. Others fall under the Fair Labor Standards Act (FLSA), Department of Labor rules, or IRS designations. These rules designate how to classify an employee for tax purposes, pay your employee including for overtime hours, properly track hours, provide time off, pay a minimum wage, and more. Not following the law will get you in trouble with your state and possibly the federal government. They won’t hesitate imposing a fine or penalty for your missteps.

6. You’ve Invited an IRS or State Tax Agency Audit

Getting caught paying your nanny “under the table” in any of the above scenarios could also trigger an IRS audit. Now the government is looking through your tax returns to see what else you may up to. If you haven’t done anything else wrong, the audit could just be a hassle. But you still may need to pay back taxes or a fine for not legally paying your nanny. According to The Motley Fool, failing to pay employment taxes can cost on average $25,000 in penalties and interest.

Take the time to do it right. Or, even better, have someone do it for you and save yourself the trouble. You will have peace of mind and may be able to take advantage of tax savings through the Child and Dependent Care Tax Credit and your employer’s Flexible Spending Account.

For more information, contact us at (518) 348-0400.

Household Employers and the Trump Tax Plan

household employers and the trump tax planFollowing the presidential election, our friends at GTM Payroll Services took a closer look at the proposed tax plan by Donald Trump with specific focus on his plan for child care taxation. Here is what their analysis revealed:

Trump Tax Plan: What it Means for Domestic Employers

Trump’s proposal to help reduce the costs of child care could also impact how domestic employers pay their nannies. Many nannies aren’t paying federal income taxes or contributing to Social Security and Medicare because their employers pay them “under the table.” But could that change?

Trump Tax Plan to Cut the Costs of Child Care

Trump is proposing an above-the-line deduction that would be capped at the average cost of child care for the age of the child in the taxpayer’s state. An above-the-line deduction subtracts from a taxpayer’s gross income in calculating an “adjusted gross income” for tax purposes. Families making less than $500,000 annually and single parents making less than $250,000 a year would be eligible for the deduction. Stay-at-home parents and families that use grandparents for child care would also be eligible.

The deduction would apply to children under age 13 and is limited to four children per taxpayer.

All families – regardless of income level – would also be able to establish Dependent Care Savings Accounts (DCSAs). These would be set up to help pay for the child care of specific individuals, including unborn children. Parents and their employers can, in total, contribute up to $2,000 annually into a specific account. Any funds remaining in the account when the child reaches 18 could be used for education expenses, but additional contributions could not be made.

It’s unclear how the average cost of child care would be determined under Trump’s plan.

State-by-state costs vary widely. For example, Massachusetts has the highest annual cost for full-time infant care at $17,062 for center-based care and $10,666 for home-based care. Mississippi is the least expensive state for child care with an average cost for center-based infant care of $4,822 and an average cost of $3,972 for home-based care.

Will Trump Tax Plan be Incentive to Increase Legal Employment?

Trump’s proposed deduction could encourage more domestic employers to pay their nannies “on the books.” They obviously can’t take advantage of the deduction without reporting the amount they pay their employee.

This could then increase the amount collected in federal taxes from nannies (whose wages are now not being reported) and the amount paid into Social Security and Medicare.

Let’s break it down.

It’s estimated that there are one million nannies in the U.S. According to the National Domestic Workers Alliance, less than nine percent of nannies are paid legally meaning income taxes are withheld and both the employee and employer pay into Social Security and Medicare.
The average hourly wage for a nanny is $9.80 according to the Economic Policy Institute, which equates to an annual gross pay of $20,384. She would owe about $2,256.28 in federal income tax as well as pay $1,263.81 into Social Security and that same amount into Medicare. Her employer would also contribute that total to Social Security and Medicare.

If 910,000 nannies are paid “off the books,” (ninety-one percent of one million) that means there is more than $2.1 billion in unpaid federal income taxes and $4.6 billion missing in Social Security and Medicare contributions.

Nannies – like most taxpayers – take advantage of deductions and credits to lower their overall tax burden so the amount in unpaid taxes and contributions is likely to be slightly lower than our estimates.

A tax plan that incents more domestic employers to pay their nannies legally through deductions can offset this diminished revenue by increasing the overall tax base. More employees would now be “on the books” and paying taxes while both employees and employers are contributing to Social Security and Medicare.

GTM Payroll Services proposes that all domestic employers – regardless of annual income – be able to deduct wholly 100% of their child care costs from their taxable income.

This type of incentive would remove any remaining obstacles for employers to be fully compliant with household employment tax laws and add hundreds of thousands of domestic workers to the tax base who would pay billions of dollars in federal income tax and Social Security and Medicare contributions.

Voting Leave for Nannies

voting leave for nanniesWith 2016’s Election Day right around the corner, employers may not be aware of the laws regarding voting leave for nannies or other household employees.

While there are no federal laws that mandate employers to provide employees time off designated for voting, most states prohibit employers from taking actions like disciplining or firing an employee who takes time off work to vote. Some states require employers to allow a certain number of hours of time off so an employee can vote. And some states also require payment to employees for voting leave.

In New York, employers are required to give up to two hours paid leave to vote to employees who do not have four consecutive non-working hours between the polls opening and closing, and who do not have “sufficient” non-working time to vote. Employees must request the leave between two and ten days before Election Day. The employer may decide whether the leave is to be taken at the beginning or end of an employee’s shift. Employers must conspicuously post this rule in the workplace ten days prior to the election.

In general, most state voting laws provide that the employer:

  • May ask employees for written requests prior to taking time off for voting,
  • Can specify a time when employees are permitted to take voting time off,
  • Is not required to give paid time off (if voting polls open for at least two hours outside of an employee’s regular shift schedule),
  • May not include lunch/meal periods as part of the time off from work, and
  • May not be disciplined or retaliated against for exercising their rights to take time off and vote.

Some best practices for household employers to consider include:

  • Allowing your employee(s) requesting time off for early voting to do so just as you would for employees voting on Election Day,
  • Double-checking the voting leave laws of your state, and
  • Reminding your employee(s) about relevant policies and procedures

Contact us at (518) 348-0400 for more information.