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January 30, 2006
Those Darn Nanny Taxes
Last week, my 2005 Schedule H packet arrived in the mail. Sked H, if it doesn't ring a bell, is the sheet you attach to your federal income tax return that reports your household employment taxes--aka, in the case of most working parents, the trio of so-called nanny taxes made up of FICA and FUTA (Social Security and Medicare taxes, plus federal unemployment tax.)
Face it, we all know people who pay their sitters more than $1,400 a year (it'll be $1,500 in 2006) who have never filled out a Schedule H. I've seen estimates of more than 2 million household employers who aren't forking over the required taxes. We know the reasons for noncompliance: The nanny isn't a citizen and doesn't have a green card (though that wasn't a good enough excuse for Zoe Baird). It costs too much. Who needs the hassle?
All I can say is that I have dutifully paid my fair share of nanny taxes for as long as I've employed a nanny--and it ain't fun. Never mind that it costs my husband and me about $2,000 a year, above and beyond her regular salary. Never mind that I have all this extra paperwork to do.
Last year, I received a lovely notice from the IRS informing me of a discrepancy between our 2003 Schedule H and information furnished by New York State. I immediately sent the IRS all the documentation to support my figures. The IRS graciously thanked me for my reply, then basically said, "tough nuggies, you still owe us $565.82 (interest included)." And it's all because New York never bothered to recertify my account (whatever that means). The IRS did suggest I take it up with the state. But who has time? I gritted my teeth and wrote a check.
Several people I know have asked me how to go about "putting their nanny on the books." Here's a quick checklist of things you need to do. Thanks to Santa Fe-based tax consultant June Walker for help on the tips:
1. Apply for an employer identification number (EIN) from the IRS. You can download the application (Form SS-4)from irs.gov.
2. Have the nanny fill out a W-4. The government requires it only if you withhold income tax, which most nanny employers don't do. But it's good to keep with your records.
3. Start withholding the nanny's share of FICA taxes: 6.2% for Social Security and 1.45% for Medicare. (Remember, you owe 6.2% and 1.45% as well--and you're responsible for the whole amount when you file your tax returns.) Then go to Staples and buy a Payroll Record pad so you can give an accounting of earnings and deductions along with every paycheck.
4. Contact your state Labor Dept. to see if you must pay state unemployment insurance tax. If so, you probably need to get a state UI registration number.
5. Give the nanny a W-2 by the next Jan. 31, and send a W-3 to the Social Security Administration.
6. File Schedule H with your next 1040.
7. Check out IRS Publication 926. Walker says she normally doesn't recommend IRS publications "because of their complexity and incomprehensibility to the layman. However, this is a good one."
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Plus, workers compensation insurance, at least in NYS. We weren't on the ball about this, out of the blue $2,500 fine arrives in the mail.
Posted by: Kate at February 9, 2006 07:21 AM
You right about worker's comp insurance in New York. You must get it if your employee works more than 40 hours a week. For those who don't live in NY, check your own state for its requirements.
Posted by: Amy Dunkin at February 15, 2006 12:33 PM
The additional tax assessment the author refers to was probably because NYS did not certify contributions to the NYS unemployment tax fund. To clear this, the employer needs to 1) write NYS and request a '940 certification' for the appropriate year for the employer's unemployment tax account and then 2) forward the 940 certification to the IRS as supporting the FUTA credit that they are dis-allowing. A pain in the bu$$ of course, but straightforward enough. To avoid all together, be sure Schedule H has the state unemployment tax account clearly indicated.
Posted by: Kathy Webb at May 3, 2006 02:24 PM
Don't forget that if you pay legally you have access to some attractive dependent care tax breaks. They can offset most -- if not all -- of the nanny tax liability. If you have access to a Dependent Care Account at work (also called a Flexible Spending Account) you can set a portion of your wages (up to $5,000 per family) as non-taxable income. For those in higher tax brackets, that equates to as much as $2,300 per year in tax savings. If you don't have access to DCA at your office, you can still capitalize on the Childcare Tax Credit which will save you up to $600 for one child or $1,200 if you have two or more children.
Posted by: Tom Breedlove at August 8, 2006 02:00 PM
I just got a $1,750 fine from NY State for lack of Workers Comp Insurance. Strangely, they used the receipt date of my exemption form (my nanny works less than 40 hours) to start my exemption, so only my first few months with my nanny were penalized. I agree with Mr. Breedlove that there are benefits for both us and our nanny to being legit with paroll taxes (and his service certainly helps ease the pain of it), but NYS is a pain in the a$$. Unless you're running for office...
Posted by: Jim at April 20, 2007 03:23 PM