Do you (or will you soon) employ a nanny, babysitter, housekeeper, driver, or other household employee? Although we are not a tax accountant, here is some useful information for you from CPA Practice Advisor.
“Nanny taxes” refer to the forms, deadlines and labor laws that apply to families that become employers. Becoming a home employer means taking on quite a few added tax responsibilities, so here are some tips to help you steer clear of common mistakes.
Know the difference between an employee and independent contractor!
This is a vital difference; especially considering that using Form 1099 and misclassifying a worker is considered tax evasion. Does the family control who, what, when or how the work is performed? In that case, the worker is an employee, NOT an independent contractor. The IRS is starting to crack down on a few industries, like household employment, with stronger enforcement initiatives so be careful.
Read up on overtime laws under FLSA
Under the Fair Labor Standards Act, nannies and other household employees are non-exempt, meaning their employer is required to pay overtime at least 1.5 times the regular rate of pay for all hours over 40 in a 7-day work week. (Live-in nannies may be an exception to this rule in most but not all states.) Don’t try to dodge this law by paying salary instead of hourly – even though the number of hours worked is not relevant for salaried employees, household workers are non-exempt so a fixed salary is illegal. Also, remember that a disgruntled employee may file a wage dispute long after termination, and if you add up back wages, back taxes, penalties and interest, this can be a very expensive mistake. A simple employment agreement is vital to avoid such a mess.
Note (from SBA.gov): If the worker and employer agree to a salary amount based on a schedule that regularly includes more than 40 hours, the family should protect itself by addressing overtime in an employment agreement that is signed by the employee. For example: Family and nanny agree to $500 per week based on a 45-hour work week. The employment agreement should specify that the weekly compensation was calculated based 40 hours at the regular rate of $10.52/hour plus 5 hours at the overtime rate of $15.78/hour. Additionally, it must be stated that any hours over 45 in a workweek will be paid at the overtime rate of $15.78/hr.
Don’t put a household employee on the company payroll
It’s a good idea to keep your personal business (household included) separate from your company business for a variety of reasons, but this one is imperative. The IRS does not consider household employees to be “direct contributors” to the success of a business, so that makes it illegal to include your domestic worker’s payroll in your company’s tax reporting, for deductions or otherwise. There is a separate household employment reporting process to use instead.
Find out the rules from a tax professional at the time of hire, not tax day
Hiring a household employee then waiting until tax time to sort out the paperwork can lead to a big, expensive, time-consuming mess for the family and their CPA. So don’t procrastinate! Dodge the misconceptions and mistakes by consulting with a tax professional at the time of hiring. This way you can prevent the mess from even happening and avoid making mistakes that might put you at odds with the IRS.
More questions? We can help with the payroll processing and reporting. And if you need a CPA to discuss income tax issues related to hiring a household employee, contact us for a referral to a tax expert we trust who can help you.
